"Changing the starting point for pension transfer advice may enable advisers to take account of customers’ objectives without being unduly focused on whether the transfer is providing a lifelong income. For members who have attained the minimum retirement age, using a DB pension to access the pension freedoms, the current TVA methodology may be less appropriate.”
In its follow-up policy statement PS16-12 FCA stated: “On pension transfers specifically, some respondents argued a strong case for extending the current methodology for TVA to incorporate other options.”
The FCA has still to confirm its revised rules on this matter, but did state that when it considers the options, it will put a strong emphasis on having a process that improves the chances of delivering good outcomes for consumers and that greater focus needs to be on consumers understanding what they are giving up and the value and uncertainty attached to the alternative options on offer.
It also said communication is a key part of the pension transfer process and it considers the current TVA comparisons are “unlikely to be helping consumers to be making informed decisions because the information is so overwhelming that it is doubtful if the document is being read”.
The rules as they stand require firms to carry out a transfer analysis including the critical yield on the basis that the alternative involves buying an annuity at retirement. This assesses what rate of return would be required under an alternative plan, taking account of charges, to match the benefits being given up on a like-for-like basis.
However, the rules do not prohibit other forms of analysis being included, such as the ‘hurdle rate’, which is the rate of growth required to provide the same pension as the scheme, but without escalation, survivor’s pension or lump sum death benefits post-retirement. In my experience, this is usually comfortably attainable, while the critical yield will be attainable in fewer than half of the cases, based on realistic assumptions.
It is also useful to demonstrate, again on a reasonable growth rate assumption, how long the client’s fund would last under pension drawdown, assuming the same level of income as the scheme pension. That is not to say they would want to match the income, but it is a helpful benchmark for the client and the adviser.
While neither of these additional measures should be relied upon in isolation, they provide useful additional information on which to base the advice. For example, insuring against inflation through an escalating or index-linked annuity is expensive. In some cases, clients have other assets they can call upon if required to supplement their income as a result of a rise in living costs, while others will feel they can reasonably adjust their expenditure needs over time and so do not need to insure the inflation risk.
