As was made clear at the end of last year, the Financial Conduct Authority (FCA) is not a happy bunny following its ongoing thematic work on pension transfers.
The regulator commented in its findings that it ‘saw firms adopting commoditised processes which did not take account of the needs of customers’. Similar concerns have been expressed by Rory Percival, an ex-regulator and specialist consultant in the pension transfer market, who has commented that ‘Suitability reports are, more often than not in my experience, poor. This is due to being overly structured and inadequately personalised’.
It has to be said that both have a valid point. Too often, it seems, since the pension freedoms of 2015, we hear tales of advice factories churning out standard recommendations based on vague desires for flexibility with income and death benefits. There is little convincing rationale for why the client needs to make the decision at this stage, little attempt at a robust comparison and no reason why the need couldn’t be met using the defined benefit scheme and a bit of creative financial planning.
The best and most convincing cases we seen often tend to be those which have unique client circumstances, distinct, personalised objectives based on these and a specific plan aimed at meeting them. Analysis is key and the plan needs to set out convincingly how the new scheme can accomplish something the ceding one couldn’t.
We saw an interesting one recently whereby the client, who was aged 54, was in significant ill health, which drove a desire to retire as soon as possible. Whilst his situation did not meet the conditions necessary to be classed as serious ill health (i.e. life expectancy of less than a year) or severe ill health (unable to work), he suffered from several chronic conditions and was in substantial discomfort. His life expectancy was significantly reduced He did not wish to work any longer than he had to and wished to enjoy his retirement while he was still able. We therefore agreed that the client had the needed to make a decision regarding his benefit crystallisation options.
Given his state of health, the client wished to pay off his liabilities, which were quantified as being a joint mortgage of £64,000, together with his credit card debt of £10,000 and his wife’s debt of £4,000. Their joint income needs in retirement had been quantified as just short of £19,000 per annum in today’s money.
The adviser in this case had established that the maximum available lump sum from the existing scheme would be £58,707.88. This would not meet the client’s need to repay his debts, given that his existing savings were minimal. In addition, the existing scheme took no account of the client’s ill health. The residual pension assuming maximum tax free cash was £8,806.18. However the adviser had ascertained that by accepting the transfer value of £402,814, they could access tax free cash of just over £100,000. This would mean ability to repay their debts and retain a £26,000 emergency fund. Given the client’s state of health, he would also be eligible for an enhanced annuity rate, which would pay a pension of £12,830.16 per annum, a significant increase.
Whilst the client was inexperienced, the fact that he was to immediately secure an income rather than leaving the fund invested removed this as a significant consideration. The only negative we could see was that the annuity was level rather than index linked, as would be the with the defined benefit scheme. However, we ascertained that assuming inflation of 2%, it would take 19 years for the defined benefit pension, were it crystallised, to match the income available from the annuity.
Both the client and his wife would be eligible for an index-linked state pension after 12 years were he to live that long and this alone would suffice to cover their essential expenditure from this point onwards. All in all, it could be clearly evidenced that the decision to transfer met the client’s objectives more thoroughly and was in his best interests.
This case shows that there is no substitute for good, client specific, analysis of needs and objectives. Sometimes, the cases which seem more complex turn out to be the more straightforward. We graded this case suitable, with nothing more than minor best practice suggestions.