The Pension Transfer Advice Process

Question 1

What are the key stages in the advice process?

Answer 1

They are the same as for any other type of financial planning:

1. Establish and define client relationship
2. Gather client data and determine goals
3. Analyse and evaluate financial status
4. Develop and present the financial plan
5. Implement the recommendations
6. Monitor and review

Question 2

Define the key actions in defining the client relationship?

Answer 2

The financial planner must detail the services to be provided and their own and the client’s responsibilities. This will include discussion about fees and how they will be paid, including any fees for ongoing advice.

At this stage it must be determined whether the planner has the appropriate skills and knowledge to meet the client’s needs – does the client require the services of a pensions transfer specialist?

If a third party must be involved then the responsibilities of all parties must be established; who will be ultimately responsible for the provision of advice, how will the relationship be conducted, how will the advice be delivered, who should the client contact if they have any queries, the tenure of the relationship, who will provide any ongoing advice.

Question 3

Gathering data and determining goals and expectations; what information must be gathered?

Answer 3

It is essential the client’s personal and financial circumstances are established in detail, this will require the collection of hard and soft facts. The client’s needs and objectives, ATR and any pension transfer specific information must also be obtained.

Question 4

Gathering data and determining goals and expectations; provide examples of hard facts?

Answer 4

Basic personal details (name, date of birth, gender, address, residency, and domicile)
Marital status, dependants (need for survivor benefits?)
State of health (including hereditary health problems)
Beneficiaries and estate planning (any existing arrangements that will be affected by the advice?)
Employment (salary, pensions, contributions)
Business interests, other income
Expenditure (near retirement, how will this change?)
Assets (additional sources of capital)
Liabilities (how will this be repaid?)
Existing pension and protection arrangements

Question 5

Gathering data and determining goals and expectations; provide examples of soft facts?

Answer 5

These are subjective and include the client’s attitudes, beliefs, opinions and feelings. They are often what actually drives people’s actions. It may be difficult to discuss some of these aspects with the client, such as mortality and survivor benefits.

Question 6

Gathering data and determining goals and expectations; what are the main areas to consider when establishing the client’s needs and objectives?

Answer 6

When does the client wish to retire?
Do they intend to stop work altogether, reduce hours or do something different?
How much income will they need in retirement?
Establish all potential sources of income and client’s attitude to each?
What are their capital requirements, now and after retirement?
Are there any liabilities that will extend into retirement, how will they be met?
What compromises are they prepared to make?
Which objectives take precedence?

Question 7

Gathering data and determining goals and expectations; what pension transfer specific information is required?

Answer 7

The regulator expects that additional specific and subjective information be gathered when a client is considering a transfer from a define benefit scheme.  This generally take the form of a questionnaire, which could be somewhat outdated following pensions freedoms regulations but was designed to investigate the following subjective issues:
The security of pension funds.
Percentage of benefits.
Cash sums at retirement.
Early retirement
Lump sum death benefits
Spouse and dependants pension
Risk and reward

Question 8

Analysis and evaluation; explain what a transfer value analysis is?

Answer 8

A transfer value analysis is the process of comparing the benefits being given up on transfer from a defined benefit scheme with those that could be provided by a defined contribution scheme that provides flexible benefits. The TVA is carried out using ‘reasonable assumptions’ (e.g. inflation rate, annuity rates) that are determined by the FCA and reviewed on a regular basis to take account of changes in legislation and economic conditions.

Generally, a TVA will be completed using an automated transfer value analysis system due to the complexity of the calculations involved.

Question 9

Analysis and evaluation; how do we evaluate ‘other’ safeguarded benefits?

Answer 9

There are a variety of other safeguarded benefits beyond the defined benefit scheme pension itself and there is no standard format or automated system for analysis of these other benefits, therefore a manual analysis is required. This should include as a minimum comparison of benefits:

At retirement;
On early/late retirement;
On early retirement due to ill health;
On death before retirement;
On death after retirement;
Options for a PCLS

Question 10

Developing and presenting the plan; what are the main sections of the suitability report, how should the advice be presented?

Answer 10

The nature of pension transfer advice is that it is complex, and a client is unlikely to be able to digest and fully consider their options from a face-to-face meeting. The timing of the presentation should consider the guarantee date and length of time it will take to fulfil trustee requirements for a transfer to take place. It should be remembered that this is a big decision for the client and they should not be rushed.

A full report and covering letter should be produced and consideration should be given to dividing the report into sections;
Introduction.
Personal and financial circumstances.
Details and analysis of the scheme.
Recommendation.
Summary.

Question 11

Implement the recommendation; what documents are required to implement the advice?

Answer 11

The receiving scheme will usually require a ‘transfer in’ form with details of the ceding scheme, and may also require confirmation appropriate independent advice has been provided. There will usually be a receiving scheme warranty for completing, confirming the receiving scheme can accept the transfer and is a registered pension scheme.

The ceding scheme requirements will vary and it is important to check what is required and what deadlines apply. The cover letter of the CETV will usually confirm the trustee’s requirements and deadlines. The documentation can include the following;
Transfer request and discharge form to be completed by the member.
Confirmation of ‘appropriate independent advice’.
Receiving scheme warranty.
Verification of age.

Question 12

Implement the recommendation; what are the potential consequences of failure to meet the trustee’s requirements within the guarantee period?

Answer 12

This will vary from scheme to scheme, but generally any of the following may apply:

The trustees may refuse to make the transfer and may not provide a new statement of entitlement within a twelve month period.
They may require the transfer value to be recalculated, and may charge for doing this.
They may recalculate the transfer value without charge, and where this has increased, complete the transfer as instructed. Where it has gone down, they may give the member the opportunity to withdraw their request.

Question 13

Monitoring and review; what specific aspects should be considered on review of pension transfer advice?

Answer 13

The performance of investments and whether the critical yield is being achieved.
Any factors that will impact on the financial plan outlined initially (legislative or taxation changes, changes to client circumstances)
Where drawdown has commenced, a review of client’s capital and income needs.

Question 14

What information can you expect to see on a statement of entitlement?

Answer 14

The statement containing the CETV is called the statement of entitlement. It will generally include:
Name and reference number of the member.
Date of joining and leaving the scheme.
The guarantee date.
The transfer amount.
The amount of the transfer value that is guaranteed.
The deferred benefits the transfer value is based on.
The normal retirement age.
The guaranteed minimum pension age.
Details of the deferred pension.