Conventional wisdom has historically seen ‘final salary’ pensions being held up as the gold standard of retirement provision. This is due to the benefits of these pensions typically outweighing what most people in an alternative ‘money purchase’ arrangement could receive in retirement.
As such, transferring benefits away from a final salary pension into an alternative money purchase arrangement was often seen as not being in the member’s interests.
In addition, the ‘Financial Conduct Authority’ (FCA) stress the starting point for final salary pension transfers should always be that a transfer will not be in the member’s best interest.
This has led to final salary transfers being seen by many in the industry as a taboo, with advice firms placing too much reliance on the output of a ‘Transfer Value Analysis’ (TVAS) report, and in particular the ‘critical yield’, in determining suitability.
Yet this over-reliance on the critical yield in isolation means individuals can receive unsuitable advice – relative to their personal circumstances, needs and objectives – to retain benefits with the final salary pension. All the while, the advice firms hide behind the critical yield.
However, without taking into consideration the individual’s personal circumstances and needs, an unsuitable recommendation to retain benefits within a final salary scheme can be as damaging as an unsuitable recommendation to transfer benefits.
As such, individuals are reliant on the skills, knowledge and experience of their advisers. This means the adviser must have the ability to provide holistic financial planning that takes into account the bigger picture rather than limited advice that looks at the final salary pension in isolation and that is heavily reliant on a single figure – the critical yield.
At Advanced Asset Consultants Ltd we fully agree with the FCA stance that the starting position should be that a transfer will not be in the individual’s best interest. However, we believe it should be exactly that, a starting point from which we should start our review.
In addition, while the critical yield is an important part of our analysis, it is merely one of a number of wider factors taken into consideration as part of the advice.
As such, the emphasis of our advice is to understand the bigger picture and to account for all the moving parts in retirement rather than focusing solely on the final salary pension.
Many client are receiving transfer values in excess of 30/35 times the pension being offerred an example of a client aged 55 has a pension built up a pension within his scheme of £23,000.
the client intended to retire earlier than the schemes normal retirement date and had left and decided to ask the trustees for a transfer figure.
Having received the information from the trustees he was offerred a sum £867,000 after careful consideration the client decided that it would meet his lifetime income as well as create a legacy for his wife and children.
These are the options that are available which many people are unaware of that can be provided although careful consideration is a must and can be a life changing amount of capital.