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When advising on DB transfers think goals, goals, goals

A pension transfer should always be assumed to not be in a client’s best interest, so it is vital to consider all alternatives. But that can only happen if their desired outcomes shine through in the paperwork

When advising on DB transfers think goals, goals, goals

When giving defined benefit (DB) advice, it is important to consider the alternatives to transferring to ensure the suitability of advice, and defend against complaints, should the worst happen.

After all, the adviser should always consider a transfer to not be in the client’s best interest, until convinced otherwise.

An adviser should fully explore all the possible alternatives to meet the client’s objectives, and document the reasons why these alternatives have been discounted if the advice ends up being to transfer.

Depending on how detailed a client’s objectives are, there may be a significant number of alternatives. These need to be assessed by running cashflow models to analyse their feasibility and suitability.

Other options

One of the most common client objectives is that they want better death benefits. This objective is incredibly vague and pays little regard to the client’s basic needs.

The lack of clarity makes it impossible for an adviser to evidence that the advice is suitable and, should a complaint be made, it will be very difficult to defend the advice they have given.

We also often find a whole-of-life quote equal to the cash equivalent transfer value (CETV) has been obtained, but with little evidence of why the sum assured should equal the CETV, or what level of death benefits are actually needed.

Capturing more information in relation to the clients’ health and life expectancy, establishing how important passing on a legacy is, of what size, and whether the client would accept a lower income in return, will help establish a more appropriate level to base life assurance quotes on.

In addition to the whole-of-life quote, alternatives such as term assurance, decreasing term and even family income benefit should be considered. The key to appropriate level and type of cover will be based on the clients’ objectives. For example, for someone aged 60 with a life expectancy of 20 years, a term assurance plan may be an appropriate alternative.

A decreasing term assurance may more accurately reflect the need for a higher lump sum in the earlier years of retirement, particularly where passing on a  legacy is of less importance than enjoying retirement.

Family income benefit would be useful to demonstrate the cost of replacing income from the DB scheme rather than a whole-of-life quote to match the CETV.

All the above term assurance plans can now be written to age 90. Underwriting services allow detailed evaluations of longevity to be undertaken, which will support the recommendation.

Client wishlist

In some cases the DB scheme pension can fulfil the client’s income need in retirement and, upon death, the requirement may be to simply replace the reduced level of spousal benefits. The sum required to meet this income requirement may be a significantly reduced figure compared with the CETV.

Cashflow modelling can be used to establish the level of benefits that might be required to meet any income shortfall.

Whole-of-life policies are often discounted because ‘the client does not wish to pay ongoing monthly premiums’.

But a client is unwilling to pay these premiums, it is unlikely they would be willing to pay an ongoing advice fee post-transfer, especially as the cost to the client is usually a similar figure to the insurance premium.

To accurately consider the alternatives to a transfer, and to avoid your analysis becoming a minefield of countless different cashflow forecasts, it is vitally important a thorough and in-depth know your client (KYC) exercise is completed. The client’s objectives must be clear and provide the detail you require to make a recommendation.

By obtaining comprehensive client objectives (ideally in their own words) advisers can filter out certain alternatives immediately.

‘Wishy-washy’ objectives with no real substance make it impossible to evidence suitability. They also make it hard for advisers to consider the alternatives to transferring a DB pension.

Carla Langley is a business risk consultant at threesixty

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