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I have been discussing, over my last couple of articles, the possible reasons for clients to transfer from one money-purchase pension contract to another.

If you have been reading those articles, you may recall that I have used as the basis for my discussions the fact that the FSA – understandably, in my view – may question the merits of such transfers to satisfy itself that there is no element of churning.

Even in my own IFA firm, I have come across a number of instances where a client’s personal pension has been transferred from, say, Standard Life to Norwich Union and back to Standard Life and back again to… You know the story. It was remarkable that the adviser could possibly justify these transfers, especially within minutes of the end of the clawback period.

However, I remain firmly convinced that money purchase to money purchase transfers can be easily justified in a number of circumstances. I have already mentioned the benefits of asset allocation in the new scheme, especially compared with poor past performance in the existing scheme and/or a wholly inappropriate fund for the level of risk the client is prepared to accept.

In this article, I will move on to the potentially thorny issue of insistent clients and execution-only clients.

Why might a client or potential client be willing or eager to transfer the value of his or her benefits from one pension scheme to another, irrespective of the possibility or probability of eventual financial loss? I discussed in my last article the desire by many of my own firm’s enquirees to consolidate a number of separate schemes into one simply for convenience. What about other circumstances or requirements?

Is my IFA firm alone in experiencing an increasing number of enquiries where the client (above age 50, of course) seeks an immediate tax-free lump sum but does not need the full amount of income which could be provided by an immediate residual annuity? I do not think so, from conversations with other IFAs around the country. These enquiries are destined for a drawdown contract and many of these contracts are held with providers which do not offer drawdown or have a minimum drawdown investment threshold above the client’s fund size.

Therefore, a transfer recommendation is almost inevitable. Yes, the client must be advised in no uncertain terms as to the risks in his proposed source of action, including much lower annuity rates and the ongoing investment risks of the unvested part of the fund, but if these risks are fully explained and understood, a drawdown recommendation can often be highly appropriate.

My own firm has a couple of preferred drawdown providers but sometimes need to stray to alternative although still highly competitive providers for lower value funds.

Suppose a client in his mid-50s effects a transfer to enable access to drawdown. What asset allocation should be used for the remaining fund? These situations require a large amount of subjective consideration as to the likely term over which the unvested part of the fund is likely to remain within the scheme before income is taken. For example, if the client envisages a need for significant income starting in, say, two years, then clearly a more conservative asset allocation strategy would seem appropriate.

Perhaps it would be appropriate in these situations to invest 25 per cent in cash funds (to cover the first few years of required income), a further 25 per cent in fixed-interest funds (probably higher projected returns but higher volatility than cash to cover some of the client’s income needs over the short to medium term), 25 per cent in commercial property funds (covering the short, medium or longer-term income needs) and the remaining 25 per cent in equities (covering the medium to long-term income needs).

These percentage examples are very simplistic and must be considered in light of the individual’s income needs, time period, and attitude to risk but at least this outline portfolio serves to highlight the need to adjust the asset allocation balance to the particular circumstances and requirements.

Only last week, I spoke on the telephone to a prospective client who wanted a drawdown contract with the residual fund invested in cash funds to minimise risk over the next 25 years or so. “How better to guarantee loss?” I thought to myself.

The week before, a drawdown client wanted to invest the residual fund entirely in equities. I thought: “Fine, if this represents only a small proportion of the client’s overall financial wealth.” But it did not. If his proposed strategy did not work because of falling equity values in the first few years, this client’s finances would never be able to recover. High income withdrawals from a falling fund spell d.i.s.a.s.t.e.r.

I would very much welcome readers’ own experiences or thoughts on this particular matter as, I feel, this is a very fast developing issue in a fast developing market.

Another topical reason clients cite to prefer a transfer even when it might not necessarily appear appropriate enables self-investment by the client through a self-invested personal pension. Great idea. Commercial property investing, direct investment in stocks and shares without paying fund managers’ charges and so on. But, let’s be honest, how many people actually make use of either of these or other additional options granted by a Sipp?

In my days as a life inspector for a pension office in the late 1980s and early 1990s, we sold small self-administered schemes as if they were going out of fashion. Same story, different decade. Lots of small to medium-sized companies loved the idea of SSASs but, in reality, few invested in anything other than insured funds. Far too many left their money in a bank account for years or often for ever. Great concept but oversold.

I am not knocking Sipps, though. Nearly all my own modest pension money rests in one. Well, it does not rest, as I mess around with a share portfolio which sometimes makes me a lot of money and sometimes loses me a lot. I enjoy it. I certainly lose a lot less than my previous dabblings in greyhound racing and fixed-odds football betting but I sometimes wonder why I bother paying stockbroker fees which exceed the fund charge on a good quality managed fund. Well, at least it relieves temporary boredom although this season I am rarely bored as I continue to wallow in the repetitive defeats suffered by Sheffield Wednesday.

In summary, I suppose what I have been trying to suggest, explain or emphasise in this article is that the willingness or eagerness of some clients to transfer their pension benefits in spite of a possibility or probability of long-term financial loss may be accommodated by a knowledgeable pension adviser. But within reason.

Please ensure you have considered every factor in the client’s circumstances and requirements, documented all these factors precisely, documented your thought process in your recommendation and, therefore, dotted every i and crossed every t.

Please be very careful. If a client refers a complaint to the Financial Services Ombudsman, be warned. The complaint may be viewed by an adjudicator with no real knowledge of our profession, who loves working strictly to set mathematical formulae with no concept or care for subjective factors and prefers to spend all his time writing very long scripts including every bit of technical pension knowledge he learned from an outdated textbook. Almost no right of appeal. Meeoow, Keith.


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