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Mike Morrison: DB transfers have finally hit the mainstream

On the days I work from home, I am often able to drop my daughter off at school around the corner. Last week, mission accomplished, I was just about to stroll home when one of the other dads sidled up to me for a word.

He wanted to confirm I still dealt with pensions and asked whether I would have a “proper” chat with him. He had “one of those final salary pension schemes” and said he wanted to transfer out of it.

I asked whether he was sure and explained it was best not to rush such decisions. But he just smiled and told me he had special circumstances. You see, someone had told him all about it and how beneficial it could be. Doesn’t it seem like everyone these days has a mate who knows all about defined benefit transfers, has done it themselves and thinks it was the best decision ever?

As the fellow father lives just around the corner I suggested that, while I am not able to give any advice at all, we should have a chat over a coffee some time.

I came away from the school that morning trying to put our brief exchange into some sort of context. I know DB transfer valuations are the flavour of the month but when they get to the school gate you know they have become mainstream.

“Doesn’t it seem like everyone these days has a mate who knows all about defined benefit transfers, has done it themselves and thinks it was the best decision ever?”

How special are your ‘special’ circumstances?

The issue is that, just like that chap, everyone thinks they have special circumstances. I know him and, with my limited objective external knowledge, I could probably argue either way for him to transfer or remain in his scheme.

The company he works for will have a good scheme and has recently come under new ownership, so I can imagine some scheme consolidation exercise would happen in the near future. I am of the understanding he has been in his job for over 25 years, so it will be a decent transfer valuation. However, I would also hazard a guess it would be a significant percentage of his total retirement wealth.

Now, we will probably have a chat and I will go through some of the factual information with him; some of the specific issues he will need to think about. I will even mention the G-word (guarantee) and tell him he is likely to be asked about his attitude to investments and investment risk.

Finding a willing adviser

Then we will get to the part he may not expect. The part where I tell him he will need to find an adviser in order to go through the exercise and this will cost money. Of course, I will stress how invaluable such advice is.

I am sure I will be asked how much. To be honest, if I quote him the range I was quoted to look at my own transfer it will scare him, so I will try and refrain from giving a cost.

I will certainly point out some advisers might not want to take him on just for this one transaction and may therefore wish to provide an ongoing investment service for an ongoing charge. I will also mention he could well be advised not to transfer at all but it will still cost him the same amount. After all, that is the value of good, objective advice. At this stage, I am not going to mention the phrase “insistent client”.

I am fairly sure my friend, who has never used an adviser before, will immediately question why he needs one. I will explain there are important issues to consider and professional advice is absolutely key. He will tell me it is all a bit pricey and he should have never listened to me and gone with his mate. In my mind I will think “but you still have your pension.”

On second thoughts, perhaps I could refrain from answering my phone and keep away from the school gate for a while…

Mike Morrison is head of platform technical at AJ Bell


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. It’s not difficult to see that DB transfers have become an obvious potential review for the future. They are in the same basket as structured products and AIM portfolios. Fine and dandy until something blows up and enough clients have lost out to get the attention of the press and the FCA (probably in that order). Then it will be a ‘hindsight’ review and it won’t be difficult to find a reason for most clients to get compensation. Client not assessed as high risk? Compensation. Client’s main source of retirement income? Compensation. Client not experienced enough to make an informed decision? Compensation. I could go on.

    Mike, the best thing from your friends perspective is to go ahead because it’s likely a heads I win, tails I win scenario. If he ends up better off transferring then he’s quids in but he also has the likely backstop of an indemnity through the review/complaint system later.

    Legal and regulatory certainty, don’t you just love it…

  2. Duncan Gafney 8th May 2017 at 3:38 pm

    Yep it boils down to the old chestnut that advice is the key. Having said that most people have no conception of why advice is so key, or that so few people (including advisers) truly understand DB pensions and the pro’s and con’s of whether it’s right for someone.

    But this is the world we live in, everyone is an expert and only if your really good at questioning people and putting points across, will they actually achieve a truly balanced understanding of whether it’s good for them or not.

    However I would make one observation Mike, that your story missed, he still works for the company in question and looks likely to still be an ongoing member, at which point it is almost certain that he would NOT be best off transferring out now, unless he can get comparable contributions from the employer. If he’s been in the scheme there for 25 years, he also not be that far off the NRD of the scheme and again most people do not realise that the “value” of the employer contribution to an FS scheme gets more and more valuable, the closer you get to the scheme retirement age. I have personally seen it have an “effective” value (compared to the fund required to purchase an equivalent annuity) of over 40% of salary despite being listed in the scheme literature as say 12%.

    I’ve also never seen any adviser other than ourselves take into account the AA and contribution limits for high earners as a factor.

    In this guys case, he might think that a transfer is a good idea, but for a well funded scheme that he is going to continue being an active member of, then I would happily bet money that it would be almost certain to be a bad idea.

    • Counter-intuitively though, the value of employer funding is not necessarily as influential as you might expect. What if he is in a post where he can expect pensionable salary to stagnate for the foreseeable future? Is it possible that revaluation of deferred benefits on opting out could in fact increase his pension year-on-year by more than each additional year of service with stagnant pensionable salary? Well, theoretically yes it is, and as well as improved accrual by opting out, he would also save the value of any member contribution to the scheme into the bargain.

  3. Terry Mullender 11th May 2017 at 10:54 am

    The advice considerations are many. Certainly the FCA presumption that remaining in the DB scheme as a deferred member is “best” for the client is both outdated, and potentially dangerous.

    The “G” word is actually the “P” word, i.e. a promise not a guarantee.

    More DB schemes will inevitably go into the PPF, and the legislation covering revaluation and escalation of deferred members pension benefits has to change (less generous) to prevent more employers going into administration.

    Factor in no inheritance tax and the ability to pass the pension asset on death to family members tax free (under age 75) from a Personal Pension Plan, as opposed to a DB pension income that is reduced by 50% on death of the member, and then entirely on the death of a spouse (if there is one) are other important considerations.

    The DB pension asset is increasingly becoming a client’s biggest asset. To assume that remaining as a deferred member of a DB scheme should continue to be the “default” position is both illogical, and from a regulatory perspective, dangerous.

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