Defined benefit transfers are often thought of as an all or nothing choice for the client. An individual can choose a guaranteed income or a flexible one but cannot have both when trustees fail to allow partial transfers.
Many advisers and providers are calling for change. Figures from the Origo Options Transfer Service, which has been running since 2008, demonstrate there has been a marked increase in pensions transfer volumes over the past few years.
The amount of money moved via pension transfers from 1 January to 31 December 2014 was £17bn. This climbed to £21bn in 2015, £25bn in 2016 and the latest figures, up to last December, stand at £31bn.
Although these figures do not breakdown the number of full transfers compared to partial transfers, they demonstrate how transfer activity has intensified.
But questions remain, when trustees do allow partial transfers, what kind of clients are they right for?
This is not just a theoretical issue but a practical one as Appleton Gerrard chartered financial planner Kusal Ariyawansa knows. Since he returned to work after the Christmas break he has been working hard to persuade trustees at a DB scheme to let a client take a partial transfer.
The client is in his fifties along with his wife. They have debts of £20,000 to £30,000, live in rented accommodation and have health issues. The man is the family breadwinner and the final salary pension is the only wealth they have. However the man is being offered a transfer value of £600,000.
Ariyawansa believes the partial transfer is the best solution for his client but is up against the clock as the scheme has set a deadline for a decision to transfer by 31 January.
He says: “Given the health issues they have suffered they need some of the money now but also want to leave a legacy to the children. They don’t have a house and are renting. They need about £100,000 via a partial transfer which would solve their problems.”
Mowatt Financial Planning director Will Mowatt has done a partial transfer but only one in his entire career. Mowatt sketches out the profile of the client who transferred:
“The client had a DB pension of £32,000 plus an expected state pension of around £8,000. His expected outgoings in retirement were around £34,000. He had other assets including a buy to let property and a further defined contribution pension.”
He adds: “The advice was to take a 25 per cent partial transfer. It would have been possible from an advice point of view to recommend a higher percentage but the client was comfortable at this level.”
Barriers to progress
Signpost Financial Planning director Nigel McTear argues a major deterrent for IFAs on transfers is the black and white nature of them. In this sense advisers are placed in the same all-or-nothing dilemma as their clients.
“I have not done partial transfers because the answer is take it or leave it. The number one problem with partial transfers is that not many schemes offer them”.
Consequently he thinks some advisers unfairly say that if there is no case for a full transfer there is no case for a partial one either.
He explains: “I suspect this is being driven by critical yield analysis and to some extent how schemes calculate CETVs for members. Some schemes have a calculation process which is more generous meaning that a member will get a higher transfer value given to them.
“The rule of thumb is the less generous the CETV, the less likely the transfer will go ahead for any given pension assuming everything else stays the same.”
Ascentric senior technical consultant Andy Zanelli believes the case for reform is clear.
He says: “A client should have choice and flexibility – the option of a partial transfer would be a big step forward for many of them.
“Should clients have to be faced with an ‘all or nothing’ cliff edge decision? Allowing partial transfers could alleviate this for the consumer and also provide more advice capacity from advisers who would be more comfortable to enter this market.”
It is clear there is a strong case for more schemes to allow partial transfers to go ahead as this would give clients and those who advise them more options, but this does not reduce the need for advice.
As Ariyawansa points out: “Each particular case will be different and you cannot generalise. The partial transfer depends on the individual.”
Royal London intermediary pension business development manager Jamie Clark says that while partial transfers may be right for an advised client, trustees may still push back because of the impact on current members.
He says: “The decision to allow partial transfers does rest with the trustees. They may feel that allowing partial transfers leaves them in a difficult position, given that they have a fiduciary duty to the members and the dependents of the members. So allowing partial transfers could be viewed as detrimental by impacting the valuable DB scheme benefits that are available to all members.”