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Ros Altmann: Setting out the case for DB transfers

There are some compelling arguments in favour of DB transfers but the decision is irrevocable

Ros AltmannDoes the new world of pension freedom and choice pave the way for fresh thinking on transferring out of defined benefit pension schemes?

In the old regime, clients would hardly ever be well-advised to give up a guaranteed employer pension. Indeed, the regulators warned strongly against such advice. Many IFAs refused to execute transfers for insistent clients for fear of future misselling claims.

But things have changed. Not only can clients pass their pensions on to loved ones but transfer values have risen enormously. Capital sums worth 30 to 40 times the annual pension are proving increasingly attractive, with billions of pounds already transferred.

A number of clients will have a few past pensions from previous employers, with some quite small deferred entitlements. Pre-1997, pension income accruals may not be inflation-linked, making the DB guarantee less attractive. Clients with a good base of guaranteed DB income could cash-in some deferred pensions and retain others.

Those who transfer do not have to annuitise, even with small sums. They can just take their tax-free cash, which may be a higher sum than they would get from their DB scheme (but they should check they are not giving up an enhanced lump sum or protected pension age).

That money can be invested to allow clients comfortable taking investment risk to benefit from long-term tax-free returns.

FCA steps up scrutiny of DB transfer adviceAnother big change is that there is no more 55 per cent death tax on unused DC funds if the client passes away. Whether the client is single or not, a DC pension fund can pass on to loved ones in full, whereas a DB scheme will only provide a fraction of the pension for a partner and perhaps none for other survivors.

Clients in poor health could also use a transfer to provide a fund for long-term care. In fact, the Government should think about allowing tax-free DC withdrawals if used for care. All that said, given the sharp rise in transfer values, the lifetime allowance is an essential consideration.

I would love to see the damaging and illogical lifetime allowance abolished but, while it exists, it provides a stumbling block to transfers.

The DB lifetime allowance test of 20 times starting pension means a £40,000 DB income is worth well below £1m but could generate a £1.5m transfer value with a hefty tax charge.

Other downsides include the fact some clients transferring could lose prior enhanced protections and transferring to Qrops can cause tax problems too. Advice comes into its own in these situations.

So there are some compelling arguments in favour of DB to DC transfers but the decision is irrevocable, so caution is vital. People with only one DB pension, who value guaranteed income with inflation and partner protection, and do not want to worry about investment risk should stay put.

But clients who like the inheritance benefits of DC, are comfortable taking investment risk with their pension, or are worried their ex-employer might fail could certainly be better off transferring some past entitlements. DC pensions are better than ever before. Let’s make the most of them.

Ros Altmann is former pensions minister


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. Alistair Cunningham 16th June 2017 at 12:22 pm

    Wow. I cannot disagree more strongly with the whole premise of this piece, and every concept explained therein.

  2. I find it interesting that most of the articles extolling the virtues of moving from DB to DC are written by people who do not face the prospect of someone coming back to judge their advice in 15-20 years’ time using the benefit of hindsight, and with (sometimes personal) financial liabilities for getting it wrong.

  3. Guaranteed employer pensions?

    This will just be the government employees, then, would it?

  4. Colin Caulfield 16th June 2017 at 1:03 pm

    Well, I actually totally agree with Ros, who speaks common sense as usual.

    My concern is not the view of clients or Ros – but driven by how the FOS/FCA will view the advice…..

  5. Robert Milligan 16th June 2017 at 1:06 pm

    There can be NO Justification for a DB transfer,,, The employer has funded an income for the employee, even if the scheme rolls over the employee gets the protection benefits, it the same old product providers and the highly over paid paid “faces” who encourage this disgraceful situation

    • Talk about proving you do not understand what a DB pension is, or how it works. Let alone have any understanding that not everyone fits into specific pigeonholes.

  6. Really Robert? What if there is no spouse but adult children, or the trustees refusing to recognise a common-law partner or a cause the member wanted to support? What if their retirement strategy did not work with the ‘all-or-nothing’ nature of DB benefits? In short, nothing is black and white (a black and white statement I know!) we live in a universe of grey!!

  7. Robert Milligan 16th June 2017 at 2:22 pm

    The employer has funded to provide an income based on the employees earnings,,, the rules are rules,,, any obfuscation surrounding alternative beneficiaries is purely trying to justify a transfer, and no such thing in Law as Common Law again we have the minority changing the rules set down in their favour of political correctness

    • The rules permit transfers… ?!?

      I agree with Chris, nothing is black and white and whilst for many a guaranteed index linked pension will be important (perhaps crucial) in retirement, there will be others who want a better quality of life, early retirement and greater flexibility in the use of the assets they have built up…. assets which may be surplus to their long term financial needs.

      A client recently said to me ‘I don’t want to be the richest 90 year old in the retirement home’ – everyone has their own drivers – an advisers job is to help them achieve their goals and open their eyes to the risks / dangers and pitfalls.

      DB is certainly a high risk area of advice but polarised views are potentially dangerous as there is generally no ‘right’ or ‘wrong’ starting point – it all depends on the client circumstances and taking everything in the round.

      Purely on financials, a DB transfer is very rarely in the clients financial best interest and only with hindsight will we know if it was.

      Likewise, on the financials, more expensive but better tasting coffee isn’t in the consumers financial interest either – but we don’t all drink the cheapest coffee – you just need to look at the high street!

      The issue therefore is that we are comparing financials vs. lifestyle choice and only one of those can be quantified.

  8. Living the Dream Dream ..... 19th June 2017 at 8:56 am

    But if you have plenty of additional income and your DB pension isnt really required and you have the wish to pass on the benefits to your family then why should a DB to DC transfer be ruled out!?

  9. Dr Altman has failed to mention it depends on the Trustee Document whether they can take TFC/TFLS. Secondly if a Occ Pension is insolvent it is insolvent. Death benefits are better elsewhere, and you are not restricted to the Trustees decision in the same way EG SWRBS Scottish Widows Retirement benefit scheme where the Trustees rip off pension beneficiaries by Mike DRoss and complicit trustees. Whn DB schems are bankrupt – the lack of employees menas they are not likely to have payments In ? which menas payments out will be restricted it is not a Harvard Business School white paper – it is Basic, Common sense.

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