Retirement Planning (DB, DC etc)

Question 1

Appropriate Pension Transfer Analysis

Answer 1

Client

• Whats the impact on their tax position
• Any impact on any means tested state benefits
• Assume living longer longer than average (i.e. to 100)

Adviser

• Trade Offs when prioritizing client needs (i.e. loss of guarantees, escalation, PPF etc)
• rate of return based on asset mix recommended for transferred funds
• All charges, including those whether or not TV takes place

Ceding & receiving Scheme

• Compare pattern of benefits taken under each
• Compare how both can meet clients income needs
• Compare how both can provide required death benefits

FCA

• Use assumptions in COBs when illustration income liley to be paid from ceding scheme at the point of retirement
• Include a TVC

Question 2

Calculating the CETV

Answer 2

1. What is the pension at the date of leaving the scheme
2. Revalue the pension using the trustees assumption for inflation to get value of pension at scheme’s NRA
3. Capitalise this value using an annuity rate based on the scheme rules and set by the scheme actuary = the Capitalised Value of the pension
4. Discount this value based on scheme investments and term to schemes pension age = The Initial Cash Equivalent (ICE)
5. ICE may be increased in discretionary increases allowed for. May be decreased to allow for scheme underfunding = CETV

Question 3

Calculate TVC (Current Replacement Cost)

Answer 3

1. What is the pension at the date of leaving the scheme
2. Revalue the pension using the FCA assumption for inflation to get value of pension at scheme’s NRA
3. Capitalise this value using an FCA prescribed annuity rate based on the scheme benefits = the Capitalised Value of the pension
4. Discount this value based on gilt returns and term to schemes pension age = Current Replacement Cost
5. The difference between the CETV and the current replacement cost - Cost of Transfer

Question 4

Factors to Consider - DB to DC

Answer 4

ATR and CFL
Income and Capital required
Death benefits
Other sources of income and capital
Death benefit is required
Health and Longevity
Inflation
PCLS
Funding status and employer strength
Critical Yield
Complexity and Cost
Taxation
PPF
Legislative changes
Impact on means tested benefits
Investment preferences
Scheme enhancement or penalty
Case study specific