Final salary transfers are a hot topic at the moment.
With Cash Equivalent Transfer Values (CETV’s) at historically high levels, interest from everyone is high. Members of final salary schemes are (understandably) interested in swapping a future income for a cash sum, and I have heard of advisers who are focusing on this area of business as it is ‘extremely profitable’.
The debate between whether it is in the member’s best interest to transfer has polarised opinion. On Monday 19 June I spent 8 hours (on one of the hottest days of the year…) in a conference hall listening to speakers debate the merits of transfer versus staying in the scheme. We heard from many different viewpoints, all of which had valid arguments as to why their view was correct.
We heard from a behavioural finance expert who talked about how people naturally prefer ‘current wealth’ (a cash sum) than ‘future wealth’ (a future income stream). We also heard from an actuary on how CETV’s are calculated, a regulatory expert on the Financial Conduct Authority’s (FCA) view of transfers, a panel of IFA’s on their approaches and an investment expert on building sustainable withdrawal strategies.
There were also 2 particular views that represent the difficulty with this area. We heard from an experienced pensions trustee who was passionately against transferring. He couldn’t see why anyone would swap a guaranteed income for a cash sum that may, or may not deliver the equivalent income. We also heard from Steve Webb (ex pensions minister) who saw a potential transfer as a huge opportunity for people to take control and add flexibility to their planning. Interestingly, I have also had a recent conversation with a pension trustee who doesn’t understand why anyone wouldn’t take the cash transfer (which proves not all trustees think alike) over relying on a sponsoring employer propping up a scheme.
But which viewpoint is right?
The answer to that is all and none. I am naturally suspicious of anyone who sees anything in black and white. In pensions (as in all financial planning) things are rarely so straight forward. There is no ‘rule of thumb’.
With very topical timing, the FCA released a consultation paper on the guidance around advising on final salary transfers 2 days after the conference. This made for interesting reading (well, for people like me anyway…) and reaffirmed our approach to this area.
So how do we do it here at Clear Vision? We start from the premise that we cannot advise you on what to do with the final salary scheme if we don’t know about you. What do you want to do with your life? What’s important to you? We also want to know about your current situation. What asset, liabilities, income and expenses do you have outside of the scheme? Who is important to you in your life?
Only once we have an idea of your ‘big picture’ can we look at how your final salary scheme fits into the jigsaw. We can then analyse the merits of transferring versus staying in the scheme against the backdrop of your current situation and your goals for the future. In our view, this is the only way to provide advice on this complex area.
It’s for this reason that we don’t take on new clients who only want a final salary transfer ‘rubber stamped’. This can cost us with lost fees, but makes sure that the advice we deliver is in our clients best interests.
If you would like us to review your final salary scheme; but only as part of a wider financial planning exercise, then please do get in contact.