Partial DB transfers – the best of both worlds?

Partial DB transfers could be the perfect solution for those caught between needing income security and income flexibility.

Not only could partial DB transfers offer the best of both worlds to clients, it could also be advantageous to employers and trustees too. Most people with a DB pension will be best advised to stick with it. A DB pension offers the peace of mind of a fixed income for life. It will be too much for most people to contemplate giving up, no matter what level of transfer value is on offer.

But what if the guaranteed income level needed to allow clients to sleep easily knowing that they’re financially secure can be met with only part of their accrued DB promise? Transferring the excess to provide income flexibility when required, or to be passed on efficiently to future generations, could generate a situation where everyone is a winner.

  • Member – win: For members who want some guaranteed income, but not as much as their full DB entitlement,  partial DB transfers may be the best fit for their needs. It can provide the guaranteed income they need, plus flexibility with the balance of their accumulated DB wealth.
  • Employer – win: Growing numbers of employers have realised that allowing partial transfers helps get DB liabilities off their balance sheet efficiently. If they stick with an ‘all or nothing’ stance, more liabilities will stay on their books.
  • Trustees – win: Every transfer paid normally improves their scheme’s actuarial funding position – leaving remaining members more secure. It’s rare for a transfer value to be higher than the actuarial ‘technical provisions’ they have to reserve for to back the DB promise.

Who might it be right for?
It may be clear cut whether or not partial DB transfers are appropriate for most clients. But there will be some who sit in the ‘grey area’, needing some guarantee but equally attracted to DC and the benefits that freedom and choice can offer. And it’s these clients who will benefit most from seeking a partial transfer. 

A guaranteed retirement income may provide peace of mind that the bills will be paid in old age. Giving up this guaranteed, inflation-proofed income for life could be a risk too far. Most simply can’t take on the downside risk of moving to DC and should stick with DB.

But for wealthier clients, worries about paying their bills or running out of money won’t be an issue. A DB income for life may simply mean surplus income and unnecessary tax. A transfer to a modern, flexible DC pension may be a better fit for their needs. The ability to take income and tax free cash from a SIPP at the levels they need, when they need it, may give a more tax efficient income and a larger legacy for loved ones.

The advice framework – and how partial transfers fit in
The FCA rules are clear. An adviser’s starting assumption should be that a DB transfer isn’t suitable. A transfer to DC should only be recommended if it’s clearly in the client’s best interests.

This doesn’t mean it’s safe to leave clients in DB where DC would suit them better. But it gives advisers a useful ‘no transfer’ default for cases in the grey area – and some leeway over where they draw the line.

However, where a partial DB transfer is an option, this changes the advice equation – and can remove any grey area. Although a full transfer may not be appropriate, a partial transfer might meet the client’s needs and aims better than sticking with the full DB pension.

Example – A client with a £40k yearly DB pension may only need a guaranteed income of £24k. A transfer value of £1M is on offer in lieu of the pension. But the client couldn’t sleep at night without their guaranteed £2k a month.

  • No transfer: Sticking with the full DB pension provides the guaranteed income the client needs. But it also gives an extra £16k a year unneeded income, an unnecessary income tax bill and, potentially, an IHT problem further down the line.
  • Full transfer: Transferring it all into flexible DC won’t guarantee the required £24k a year – risking a bad client outcome, regulatory sanction and lost sleep all round. And in current conditions, partial annuitisation under DC post-transfer to secure the £24k a year may not make economic sense.

What if a partial transfer was available?

  • Partial transfer: Leaving £24k a year guaranteed income in DB, and transferring the other 40% of the value (£400k) into a flexible DC plan, could give the best of both worlds. It covers the client’s guaranteed income needs efficiently and gives flexibility to draw extra funds when needed, manage tax or create a legacy with the balance. The ideal advice solution?


Will schemes offer partial transfers?
Many schemes don’t currently offer the option of a partial DB transfer. It simply wasn’t historically a feature of the DB landscape. But the numbers now offering partial transfers is on the rise.

The barriers holding some DB schemes back from introducing a partial transfer option are the perceived complexity and cost. Legal fees to amend the scheme documents, actuarial fees to develop a transfer basis and the costs of implementing the necessary administrative processes can all be off-putting.

But these are all achievable. If scheme trustees thought about it, they already provide partial transfers every time they receive a pension sharing order. It’s just about industrialising the process. And the payback for all concerned could be worth it.

Clients with DB and DC rights under the same scheme now have a statutory right to transfer their DC rights and leave the DB pension behind (or vice versa). An ‘all or nothing’ transfer ultimatum doesn’t always support the best member outcomes. It’s why the law was changed to allow DB and DC rights to be transferred independently. But there’s currently no statutory right to make a partial transfer of DB rights.

There are some potential legislative obstacles which may prevent a partial DB transfer. For example, the law doesn’t allow for a partial transfer of GMP rights. And scheme specific protection to both tax free cash entitlement and early retirement ages may be affected following a partial transfer. But there are normally ways to plan around these.

In summary
If this ‘best of both’ option is the best fit for your client’s needs, ask the question of the DB trustees – does their scheme offer partial transfers? And if not, ‘why not?’ By articulating the win/win result this option can produce, it might just trigger a light bulb moment for the employer/ trustees that opens up the most appropriate option for your client and creates the best advice solution for you.

retirement-options-guide-couple

Partial DB transfers – the best of both worlds?

 

Source: Standard Life technical consulting 10th May 2017

I smell a rat

money rat

Keep this guy away from your dosh!

Maybe it’s the cynic in me, or maybe my natural in-built auditor, but it seems to me that dodgy investments and tax schemes are on the increase.

One reason for this may be the fact that our authorities continue to be particularly lenient to companies which make promises, collect cash, fail to deliver and then are liquidated (or just disappear), only to reappear in a similar form and under a new name shortly afterwards, while the creditors receive nothing or only pennies in the pound.

Another reason is that there is just too much fraud around, and the country’s fraud squads are spread far too thinly.

Sometimes downright fraud is at the core of the issue, but there are varying degrees.  There seem to be quite a few who carry on in this manner who have a nose for what they can get away with, just about staying within the statutes or knowing how to work the areas that simply aren’t enforced. Either way these people are duplicitous and acting without any level of integrity.

Sometimes, as an independent financial adviser, I am feted by some pretty dodgy looking companies to act as an introducer of clients to them. This is usually by way of an email, and often  the company has a very impressive website. The promoters, who make much of the introducer commissions they offer,  may be pushing unregulated investments, such as property developments (particularly holiday property overseas), or maybe tax schemes  – particularly for persons contracting through their own limited companies, and so on.

Occasionally, the business and its product are bone fide, but nevertheless non-mainstream and requiring significant due diligence from anyone who might recommend or otherwise promote them. Frequently they are not.

So can I make a few basic recommendations here? (spot the over-used old sayings):

  • With only a very small number of exceptions (linked to the UK Treasury or National Savings and Investments), there is no such thing as a guaranteed return on an investment. 
  • If you are a UK contractor and are encouraged to join a scheme that involves any kind of offshore trust, loans back to you personally, gifting of income or invoicing an unrelated entity, it will almost certainly fail as and when it comes under HMRC’s spotlight. This is likely to have very serious implications, and additional costs to the contractor. Occasionally, you end up with a very large debt due to the offshore company involved too. Avoid these schemes. If you are a UK contractor and want to minimise your tax bill, come talk to me for sensible tax advice.
  • There are no free lunches!
  • If you are contacted by anyone who is promoting any kind of investment product which they profess to be either a hot stock, something with guaranteed returns, low risk and high returns, or whatever, agree to nothingAlways always run it past a trusted professional such as your independent financial adviser. But before you even do that, try asking some common sense questions of that person and write down the answers so that you can check their story. What is the full name of the individual calling and of the company which they are a part of,  where does it have its office address and what is its telephone number? You can easily check the existence of a UK company at companies house online, and it is even operating a free documents service at present allowing you to look up the directors and officers, and even look at the accounts of the company. By clicking on the directors names, you can see other companies with which they are connected. This is my first port of call in any basic due diligence.
  • And never never never agree to pay money over the telephone for anything. There are some very persuasive people out there with some very clever, well honed stories to tell. Assume it is dodgy. One may not be able to prove it is dodgy, indeed maybe no investors have been screwed (yet), but if it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.  

Of course, there can be exceptions to anything and occasionally a tax scheme or unregulated investment promoted direct that initially seemed dodgy can be a pretty decent proposition to certain people at certain times. But in all cases I would recommend you keep your chequebook in your pocket until you have spoken to a seasoned professional adviser. There are a host of excellent investment opportunities out there and a good investment adviser will be able to help you find the appropriate investments with which to populate your portfoli, which carry a suitable amount of risk in line with your requirements and achieve your objectives.

Now I really must get on. Apparently I’ve won the Nigerian lottery (!), and I need to sort out a rather complicated claims process……………….

 

 

Whole of Life insurance zz.zzz.zzz

OK some topics aren’t exactly exciting but this is supposed to be a financial blog after all.

Carrying on with the direct offer by post theme, Legal and General recently sent me an offer for whole of life insurance. The deal is that I am guaranteed to be accepted, but if I die from natural causes in the first two years it doesn’t pay. Also, if I lived to the age of 90, I don’t have to pay premiums thereafter but the cover remains in place.

Looking at the rates on offer, compared to standard rates I can obtain in the market, I see that as a healthy non-smoker, I can obtain more than double the cover with Legal and General themselves on the same type of plan for the same price. However, that route involves underwriting and a lengthy application form.

So whilst a plan like this is poor value for a healthy person, I guess it could well be attractive to somebody in less than good health, so long as they are not at death’s door.

And if you sign up you get £50 worth of M&S vouchers as a “birthday gift”. Yippee. Only it will take at least three months to arrive. 

So to re-cap, if you’re not in good health, want to insure your life, and fancy a socks and underwear shopping spree, you might want to sign up. But I recommend that you speak to an IFA first, as the simple route isn’t always the most economic.

(Un)Friendly Society

The other day I received a big glossy pack from one of my family’s car insurers. I won’t say which insurance company, but if it was a butterfly it would be a red one.

It wasn’t car insurance they were selling, but an investment plan of some kind in conjunction with a Friendly Society. Again, I won’t say which one, but it’s to be found north of the border. Now, (as every good IFA knows) there is a quirk in our tax system (which goes back to the Battle of Hastings or Magna Carta or something) which allows individuals to invest in a Friendly Society plan and receive tax-free returns. The only problem is, the maximum allowed is £25 per month or £270 a year. So they tend to be mostly shunned by IFA’s and consumers alike since they are pretty trivial, especially when compared to ISA allowances.

Nevertheless, it sounded pretty good. Looking further at the glossy pictures and precious prose, I saw that one could actually invest greater than £25 p.m., but would incur tax at source on any excess premium. Fair enough. The investment was a 10 year plan and included a small amount of life insurance… aha! Yes it’s a Maximum Investment Plan too! – quite innovative, mixing up a friendly society plan with a MIP. The deal with MIPs is that if you hold them for a minimum term (e.g 10 years) no further tax is payable on growth even for higher rate or additional rate taxpayers.

But, as ever, the devil is in the detail. With my accountant hat on, I wanted to see the charges. Crikey! – 50% of the policyholders’ contributions in the first year would be deducted as a selling expense. Ongoing charges, (ignoring charges for the little bit of life insurance), were 1.5% AMC for a tracker fund (default) or the alternative managed fund. Oh, and there is a £1.00 a month plan charge deducted from the tax-free element, so that’s and extra 4% deducted every month against a £25 p.m. premium.

What I thought was a bit off, was that the charges were not really mentioned in the glossy letter which, when opened, became a very simple application form. Nor were they mentioned much in the small brochure, also attached. However, and as required by the FSA (hurray), there was a key features document with less pictures and lots of writing, setting out all the costs. Having found the charges, I looked for the reduction in yield figures over the 10 year term, and found that the tax-free plan would see a 7% gross investment return in the fund reduce to 3.4% after charges. In other words, more than half any investment growth would be lost in the charges.

Not exactly Admirable, eh? – and not so Friendly. Oh, but I forgot – they give you £15 in M&S vouchers for every plan you take out.

So that’s all right then.