DBAAT myths

The article dispels the myth that transferring a single guaranteed pension to a flexible drawdown plan is unsuitable. It emphasises evidence-based assessments and cash flow analysis for suitable advice, stressing the importance of clear documentation and understanding by all parties involved.

When a consumer only has one guaranteed pension, is it possible to give suitable advice to transfer it to a flexible drawdown pension plan at retirement?

Yes. Who says so? The FCA.

There is a myth that when assessing advice using the FCA DBAAT, the pension transfer advice will be unsuitable, where the consumer is reliant on that one guaranteed income.

Not true

Myth #1

You might be doing DBAAT reviews in the context of PS22/14 (BSPS redress scheme). Don’t be driven by mythology. Assess the evidence and apply the guidance.

Look at the facts, as directly translated from FCA guidance:

  • Using the available evidence (normally described as contemporaneous evidence, identify the amount the consumer needs to meet anticipated expenses and personal outlays throughout retirement by forecasting expenditure plans, intention or preference for early retirement and/or clearing debts, assessing whether the spending seems reasonable;
  • Identify the anticipated income from the alternative scheme at NRD/consumer’s preferred retirement date (whichever is earlier) and then assess how the income from the alternative scheme, including inflationary increases, contributes to the consumer’s sustainable income needs;
  • Assess whether the consumer can produce the same or similar planned expenditure needs throughout retirement to various mortality ages (from the alternative scheme), using their available assets from all pension schemes (including the proposed arrangement) and taking account of withdrawal frequency/timing/amounts, investment performance, other savings and investments, state pensions and whether this is a single or joint planning case.

In other words – have you done extensive, deep and wide cashflow modelling of the consumers plans (single or joint) in retirement and stress-tested them?

Are these plans sustainable?

Do you have the clients informed consent in accepting your advice?

The final step is to decide (yes or no) on these TWO questions (quoted directly from FCA guidance):

  • (a) the consumer can produce the same or similar contribution towards their income needs from the proposed arrangement (the pension transfer amount and other assets);
  • (b) the consumer has the requisite capacity for loss, taking into account the impact of the factors considered on the sustainability of the proposed arrangement.

If the answer to (a) and (b) is ‘yes’, conclude that the consumer is not likely to be reliant on income from the alternative Scheme.

And the advice is suitable (in this aspect), as assessed by the DBAAT.

Myth #2

It is mythology to suggest that good retirement planning is going to automatically fail the DBAAT assessment automatically.

If you have collected sufficient evidence to do a deep and detailed cash flow analysis of a client’s retirement plans and applied rigorous stress testing on the alternative advised proposal, it is likely that you will have had this (part of the DBAAT assessment) assessed as suitable. We see a lot of cases where there is no evidence of the state pension forecast nor the pension of the partner/spouse.

Evidence-based assessments – not mythology.

Do you have this evidence in your file? Sadly, in many cases the evidence is not there on file. It’s not easy to find and it’s difficult to understand.

Think about that from a consumer duty perspective – if we can’t understand it, what chances have the FCA or FOS have of understanding it?

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