Defined Benefit transfer recommendations - Media article

DBdoobydoo

DairyQueen wrote: »

Had you been able to transfer-out then you would have been exposed to market risks (and they are considerable) but, for some, that risk may have been preferable to the certainty that a substantial part of their retirement income will devalue in real terms each year.

The alternative would have been to purchase an annuity. Possible that the initial income would have been lower but you would, at least, have had the opportunity to inflation-protect that income.

Assuming I would have got a 30x CETV income it looks like an indexed annuity wouldn't be far off what I get now & would certainly be more in total over my lifetime

There would be no need to be exposed to market risks as even utilising the safest most conservative investments to yield 1% per annum I would be still be ahead of a flatlined pension.

I'm still working full time so the free money from laundering £2880 through a SIPP wouldn't work for me. Ironically I'm only working to pay the mortgage whereas if I could transfer out from my flatlined pension I could pay off the mortgage & retire as I have a couple of other pensions that are ample for living expenses.

HappyHarry

DairyQueen wrote: »

The IFA I used for my DB transfer did not share xylophone's intimate understanding of GMP rules, let alone how they affected me and my scheme. He had made no allowance for the impact of (minimal/zero) indexation on the pension in payment until I pointed it out. This is just one example of the limitations of IFA advice. Many are very good but they are rarely experts in every aspect of several decades of pension legislation, and the devil is in the detail.

The devil is very much in the detail. Sorry to hear your experience DairyQueen, but that's the kind of adviser that shouldn't be let anywhere near DB transfer advice. How can a transfer analysis be completed if the adviser can't even work out the future income rules from the DB pension!

I spend a lot of time on here defending good IFAs, but have no time or patience at all with the bad ones. I just get very cross!

Hopefully the recent FCA crackdown and the PI crackdown has resulted in this adviser no longer having transfer permissions.

Malthusian

JoeCrystal wrote: »

Frankly, every person who opted for a DB pension transfer knew exactly the risk.

A financial adviser has complained about the treatment of three vulnerable clients who had their defined benefit pensions transferred to unregulated investments in Malta.

One client was retired on ill-health grounds and living on state benefits at the time of the advice. Another has learning difficulties, while the third is still in employment.

The client with learning difficulties was cold-called in 2015 and was told the sooner he moved his pension, the better, Hodges [financial adviser Jane Hodges] reports.

He was inexperienced financially and was assessed as having a high-to-medium risk rating when he should have been registered as cautious, Hodges says.

A final salary transfer value of £111,960 was sent to the Qrops and Hodges says she has seen a letter stating First Review Pension Services made the transfer. The range of investments the pensions from the three clients have fallen into include fractional hotel ownership that can only be encashed if sold to another investor with a quoted 15 per cent transaction fee; loan notes that cannot be encashed early and are in high-risk companies; and a high-risk global investment fund with ongoing annual charges of 2.25 per cent.

https://www.moneymarketing.co.uk/adviser-raises-alarm-about-dodgy-db-transfers-to-maltese-qrops-leave/

Still, it's probably his fault he has learning difficulties. Maybe he's doing an I Am Sam to get free compo. [/sarcasm] [/ladling on]

xylophone

Until then, all indexation on pre-1988 GMP, and any indexation shortfall on post-1988 GMP, on pensions in payment, had been guaranteed and paid by the state.

There were circumstances where a retiree would not see any such indexation for a very long number of years - this could happen when a pension was deferred with fixed rate revaluation on the GMP and the pre 97 GMP (COD) was far higher than the pre 97 ASP.

xylophone

xylophone is an expert

Not really in any professional sense - circumstances required me to look into it fairly thoroughly at one point and I continued to read up afterwards.

xylophone

Re post 25 above

This note explains it very well.


State Second Pension: Contracted-out deductions
Standard Note:
SN/BT 2674
Last updated:
10 March 2010
Author:
Djuna Thurley
Section
Business and Transport Section
Members are often approached by constituents who find out that their additional state pension (SERPS/State Second Pension) has been significantly reduced, or removed altogether by a “contracted-out deduction” (COD). The Pensions Act 2008 contains measures to simplify CODs. This note looks at how CODs work and discusses some of the issues raised in connection with them.
Other notes of possible interest are SN/BT 4822 Contracting out of the State Second Pension and SN/BT 255, State Second Pension.

pvt

jimi_man wrote: »

they want £xxxxxx in a pot now rather than the slow and steady DB option.

But you're making assumptions when you say "slow".

My principal reason for taking a CETV was that I can control the flow of money out of a pension pot, and pass on to my offspring what isn't needed. If I had opted for the DB benefits I would be getting vastly more income than I want or need, paying shed loads of tax (at higher rates once my state pension kicks in) just so I can amass a pile more savings that will add to what already looks like being a very rude IHT bill when I move on.

Everyone's circumstances are different. I am very happy that I did what I did and that I had the option to do it.

Take PCP and other car leasing arrangements, which I believe are financial stupidity beyond all measure - borrowing money to fund a depreciating asset and, after shelling out deposits and 36 to 60 months of lumpy repayments, ending up with virtually nothing. I would suggest most people funding their cars in this way don't really understand them, or that they're suitable for very few people. But despite that I don't see anyone suggesting a regulator should ban those.

Perhaps my view of CETVing a DB scheme to a SIPP is coloured by seeing two former colleagues pop their cloggs within 6 months of retiring - and one of those had even decided not to take a PCLS and opted for the higher income.

As has already been said, and it is rather obvious, almost anyone who has CETV'd their DB would probably have had to get regulated advice from an appropriate IFA. Those not wanting to do it would by and large not have wasted money getting advice about it. So it is surely obvious that the numbers seeking advice and opting to CETV to a SIPP would not reflect the 1 in 10 figure.

blisteringblue

DairyQueen wrote: »

I am one of such people. I know the risk. If it goes 'belly-up' I won't be seeking compensation. I was correctly advised to transfer and I have no regrets. Nor will I have regrets when the market crashes. I am prepared for that certainty.

Ditto, I've posted in other threads our DB Scheme was closed in 2006 after the company was sold so I've been in DC since then and lived through the 2008 crash when it dropped more than 50% so yes I know the risks.

However end of the day I had 3 DB pensions and I've transferred 2 out, the third was not good enough.

I've given up £14K available as £9K @ 60 and £5K @ 65 (currently 51) for a pot that will allow me to retire at 55 years old. This has been my goal for 20 years and it's the only way I could do this.

I have nothing exotic, level 2 risk funds (split between 3) which are performing as expected.

I've still the DB I didn't transfer and full state pension @ 67 which will be a combined 12K as a backstop top up, but I should be fine off 4% safe drawdown on the DC pots.

It really isn't the case that all DB transfers are bad, but you really do have to go in with your eyes open and understand the risks.

AnotherJoe

anselld wrote: »

Suspect the data is heavily skewed since due to the relatively high cost of such advice people will only seek the advice in the first place if they think there is a reasonable chance it will give them the answer they want.

Exactly. Its a joke to suggest its wrong merely because the preponderance is a recommendation to transfer since by its very nature those who dont have a good case or are told right away its likely to be unsuitable, are much less likely to proceed and thus wont appear in the stats. Its a self selecting group of those more likely to be recommended.


Whats next a survey that says that 9 out of 10 people who go to the barbers need a haircut which proves barbers are mostly giving haircuts to people that dont need them since on average only 1 in 10 of the populace need a haircut.

MarkCarnage

A more detailed read at the FCA press release shows a somewhat more nuanced picture.

The 'headline figure' does NOT take account of those who did not proceed after going through an initial triage process with their adviser. If this is taken into account, the number falls to around 55%. As already noted, it is also to a degree, a self selecting group, so the % figure can be expected to be higher than if the whole universe of DB recipients was taken into account.

I would definitely agree that for the whole universe, the figure is likely to be well below 50% and probably closer to 10%. However, as the replies to this thread demonstrate, there are a number of circumstances where it is likely to be a worthwhile option. The concept that it has to be black and white at the decision point is misguided, and perhaps a better approach would be probability based, with a fairly high confidence level, perhaps 95% probability of being better off subject to various assumptions.

One point not covered in this debate is the probability and more importantly the time horizon of that probability, of return outcome between a predominantly equity portfolio and index linked gilts (as a proxy for DB pension outcomes). That requires some high level modelling assumptions clearly, but what has happened in recent years is that the break even time horizon for that 95% probability figure of a global equity portfolio outperforming ILGs has fallen very considerably, from perhaps 25-30 years to below 10 years. Lots of reasons for this, but the key takeaway is that you would have to be very risk averse for it not to work in many cases. The above is also being generous in that the ILG portfoio is based on uncapped RPI not capped CPI which many schemes now offer. The situation in recent years has in large part been created by regulatory constraints on many institutional market participants, including DB pension funds. It is a QE induced distortion, which regulatory models assume will persist indefinitely. There is scope for individuals, either with the knowledge themselves, or well advised, to take advantage of that with a very high probability of success.

I will re-emphasise, this certainly doesn't make it suitable for everyone or even the majority, but it does indicate that the starting point of strong presumption not to transfer, which was right for a long period of time, may not have such a strong support in theory now.

In my own case, I've retained my largest DB pension, as I see it as the bedrock 'annuity' of my retirement income, but the case for transferring two smaller ones to a SIPP was very compelling on many grounds to me, and my adviser supported that analysis after full due diligence as required. I am very glad I made the move when I did (2016) as I fear it would be a much harder exercise now, mainly for all the wrong reasons. Even then, I had to have some very direct conversations myself with the FCA before they allowed my second transfer to finalise - the matter would otherwise have been left in limbo for an indeterminate time period. Ironically it would have concluded by then but for administrative incompetence on behalf of the transferring scheme who failed to meet statutory deadlines. In the end I had to threaten legal action against the FCA before they allowed it to proceed.

The FCA appear to want to outlaw DB transfers by the back door rather than having the 'cojones' to admit that they just want to stop it. Decisions like allowing retrospective challenges of 'insistent client' transactions make me despair of them. They should have been adopting a much more targeted, risk based assessment of poor transfer advice than appears to have been the case.