DB to DC pension transfer - Client considerations For adviser use only
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This form has been prepared as a general style for advisers and is for information only. It is not intended to satisfy all the regulatory and compliance responsibilities owed by advisers to their clients nor is it intended to replace existing compliance and due diligence processes. The issues for consideration listed in this document are not intended to be exhaustive and should not be regarded as a summary of all the due diligence required to be undertaken by advisers when considering a transfer out of a Defined Benefit scheme. Other factors beyond the scope of this document may also be relevant. Advisers should satisfy themselves as to the appropriateness of this document for their clients’ purposes. This document is used at advisers’ own risk and no responsibility is accepted by Standard Life for any problems caused by reliance on, or use of, this document. Standard Life do not recommend that advisers pass this document onto clients. Standard Life do not recommend that this document is used by anyone who is not a financial adviser regulated and approved by the Financial Conduct Authority in the United Kingdom. Whilst the case for considering a pension transfer has become more compelling for some, a final salary pension remains a great benefit to hold. It is for this reason that we have developed a ‘triage’ service which gives you the opportunity to explore your client’s motivation to consider a transfer. A triage service could save you and your client the time required to complete in-depth analysis and help avoid them having to pay unnecessary advice costs when the outcome is to retain the final salary benefit. To support this process we have developed the document below which will help drive out the client’s motivations and may help streamline the advice process should it go ahead. If the client develops a good understanding at this stage it may also save time and reduce risk. Your client has expressed an interest in finding out whether or not a transfer of their deferred Defined Benefit (DB) arrangement from the sponsoring employer is right for them. The advice framework for this process requires in depth analysis before a recommendation can be made. In order to avoid their clients having to pay unnecessary advice costs, advisers might wish to ask each one of them to consider the motivation behind their request to consider a transfer. Before looking in more detail at the considerations which should be taken into account, advisers may wish to provide clients with an overview of the features of a Defined Benefit scheme.
Defined Benefit schemes explained A Defined Benefit (DB) scheme, sometimes referred to as a final salary scheme, is usually seen as being very advantageous for members because the scheme takes all investment risk and is obliged to meet the ‘pension promise’ of a pre-defined amount of guaranteed income to the scheme member, regardless of how the underlying investments have performed. This means the risk sits with the employer rather than the scheme member. The income you receive is: ¬¬ guaranteed throughout retirement and will be paid directly to the scheme member usually on a monthly basis ¬¬ normally inclusive of some protection against the effects of inflation. The scheme will usually also pay a widow/widowers pension or dependant’s pension on the scheme member’s death.
Why are you considering a transfer The adviser may also ask clients to express in their own words why they would like to consider a transfer of DB benefits. This enables advisers to focus on the triggers that are important to their clients.
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DB to DC pension transfer - client considerations
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Let’s now look at the considerations that should be taken into account when considering a reason for transferring benefits, as it may be possible to better meet client objectives with other solutions, either with or instead of transferring your DB benefits. The adviser will only look at the sections that are relevant to the client, based on the reasons given for wishing to transfer benefits.
Reasons for wishing to transfer
Analysis and considerations
Client view
Conclusions
¬¬ Fully understand your income need and what plans are in place to provide that income
Death Benefits/Leave a Legacy
¬¬ Demonstrate how the income need will be met ¬¬ Is Long Term Care an issue, and if so, what impact might this have on the ability to leave a legacy? ¬¬ Is there a potential IHT issue, and if so, what plans are in place to mitigate this? ¬¬ Impact of penalty v transfer value and income provided via drawdown/annuity
Early retirement
¬¬ Is there scope to leave until scheme actual retirement date? ¬¬ Could an income be drawn from other assets? ¬¬ Does the scheme allow partial transfers? ¬¬ Demonstrate income in retirement needs are secured
At retirement
¬¬ Fully understand the income need/provision is in place ¬¬ Does the scheme allow partial transfers?
Lifetime Allowance
Other taxation considerations
No spouse or dependants
¬¬ Would a transfer create any lifetime allowance issues? ¬¬ Define and confirm impact i.e. continuation in employment ¬¬ Use of other tax allowance to create an income ¬¬ Your instruction should be captured now so that you know that any assets remaining in your pension on death will be paid out in line with your wishes ¬¬ Spouse/dependants adequately provided for i.e. a sustainable income for life
Serious ill health and client mortality expectations
¬¬ Quantify the impact of ill health ¬¬ Specific medical, lifestyle or other factors ¬¬ DB v Drawdown v Enhanced Annuity taking into account the views of spouse/ dependants
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Reasons for wishing Analysis and considerations to transfer Client mortality expectations
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Client view
Conclusions
¬¬ Specific medical, lifestyle or other factors
¬¬ If for debt repayment, is there a culture of debt? Larger lump sum for debt repayment or other capital need
¬¬ What is the income/ expenditure going forward and is there any concern about debt still featuring? ¬¬ What alternatives are available for repayment of the debt? ¬¬ What is the current funding position of the scheme?
Client concerns over the solvency of the sponsoring employer
¬¬ The client should be made aware of the trustees responsibility to implement a recovery plan for the scheme if required ¬¬ Potential impact of PPF limitations must be established
In addition to the considerations above we should also take into account the following factors for all DB Transfers. ¬¬ Attitude to investment risk and capacity for loss ¬¬ What is the client’s experience of investing in the markets? ¬¬ Longevity expectation and the impact on sustainability of income in retirement ¬¬ Where there is a spouse/partner, what pension provision, if any, do they have in place? ¬¬ Level of income likely to be needed in retirement
– Essential – Lifestyle
¬¬ Cash Flow modelling – where customer is taking an income (subject to modelling tool available) There will be other factors we take into account which are specific to your circumstances.
May 2016
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Standard Life Assurance Limited is registered in Scotland (SC286833) at Standard Life House, 30 Lothian Road, Edinburgh EH1 2DH. Standard Life Assurance Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. www.standardlife.co.uk GEN2738 0516 ©2016 Standard Life
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