Seven ways to dodge the FCA pension transfer crackdown
Breathed a sigh of relief your firm escaped the FCA’s scrutiny into pension transfer advice? Think again. The regulator is widening its net, and has said it will keep going until it believes the advice has reached “an acceptable standard”.
So how can you stay on the right side of the regulator? By sticking like glue to its rules – and knowing when you can legitimately deviate from its starting stance (that a defined benefit transfer is unsuitable) by proving it is in the client’s best interests.
1) Can they afford it?
For wealthy clients with multiple pots, a couple of DB schemes here, a few large defined contribution pensions there, cashing in one is not going to materially affect their ability to have a comfortable income to maintain their lifestyle in retirement.
Clever financial planning could make it a perfectly sensible idea, for example, to pay for living expenses after quitting work but before the state pension or normal DB payment age kicks in.
2) Buying an enhanced annuity
A client in ill health who has a lower life expectancy than most will likely be eligible for an enhanced annuity. Using a transfer to buy one could offer them the same amount of guaranteed income, while leaving money over to pay off debts or pass on to loved ones.
3) Single person premium
Unmarried or unattached client? The transfer value on offer may include the cost of paying death benefits to a spouse. If it isn’t needed it could be reinvested for a bigger gain, once they have ensured a sufficient income.
Pension freedoms were designed to offer savers ultimate flexibility to do with their retirement pots as they wish. For someone in hardship, but with a defined benefit scheme, the freedom to transfer into a defined contribution scheme from age 55 to pay off debts could be a justifiable lifeline.
5) Enhanced transfer values
Some defined benefit schemes offer enhanced transfer values; larger lump sums to encourage members to leave so the company is no longer required to pay them an income for life. With this enhanced pay-off, the client could achieve a much larger income than from their DB pension.
Likewise it may be worth exiting a scheme if it looks to be in trouble, and so unable to pay an income in future. Failed DB schemes fall into the Pension Protection Fund, which is a good safety net, covering up to 90pc of pension income, but that is still a drop that could be avoided with a transfer.
6) Avoiding penalities
Where a DB scheme’s rules mean a member who wants to retire early will significantly lose out in retirement income, a transfer could offer a better deal.
7) IHT planning
Untouched defined contribution pensions can be passed on to loved ones free of inheritance tax. However the same rules don’t apply to DB schemes. This can make a transfer a good idea, especially where there is no spouse in line to receive death benefits from the DB scheme anyway.