Hindsight is a wonderful thing. Just think about the better decisions we could all make if we knew exactly how things would turn out in the end - decisions on careers, houses, fashion styles!
There is a link between that sentiment and what’s happening with transfers out of defined benefits schemes.
We all know employers with defined benefit schemes are going through a rough time and, unable to wind up their pension schemes, are eager to manage their liabilities on an ongoing basis. One of the ways to do this is to encourage transfers out of the scheme, particularly from deferred members, those who have left the service of the employer.
And to do this some employers are offering an incentive or sweetener alongside the transfer value. Sometimes this incentive or sweetener is in the form of extra added value, on top of the transfer. Sometimes it’s separate from the transfer value and in the form of hard cash and, apparently, tax-free hard cash. On first impressions, some might say it really doesn’t get more appealing than that!
Faced with such encouragement, it’s going to take a hard-nosed pension-savvy client to turn this away. But should they? Such offers can be very appealing, and there is truth in the old adage a bird in the hand is worth two in the bush, especially when you consider schemes’ funding positions on a full buyout basis. But if an incentive is being offered at all then it makes sense to assume that the transfer value may not be the full rate. If it was, why offer the incentive?
It looks like it’s going to be the advisers who will have to decide what is right for the client. And that’s where hindsight would be so welcome. If only we knew what was going to happen to the employer, to the scheme, to the calculation method for transfer values (will they increase?), what the future reaction of regulators was going to be to this. It would all be so much easier.
Advisers are going to have to approach this area very carefully. Assess all your risks and manage them. Document everything. Be aware of the pressure the employer places on the client. Think about how to deal with insistent clients who only want to take the cash, regardless of your advice. We haven’t got hindsight – but instead let’s make sure we apply common sense.
Rachel Vahey is head of pensions development at Aegon Scottish Equitable.
The views expressed are those of the author and not those of the company she represents.IFAonline
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