DB Transfers: Advising with ConfidenceFive best practice steps for a robust defined benefit (DB) to defined contribution (DC) transfer process.

For financial advisers only.

Please note: firms advising on DB transfers must be authorised by the UK Financial Conduct Authority (FCA) to conduct pension transfers and opt outs.

Includes steps post 1 October 2018

Analysing the client’s needs

What do you require to analyse a client’s needs?

DB transfers viewed as part of a full financial planning service

Understanding the DB SchemeWhat evidence do

you need to collate?What information do you

need to identify?

Producing reports

What reports need to be run?What data needs to be input?What do the outputs tell you?

Comparison of benefits

The compare and contrast approach

Identifying trade-offs

Preparing your recommendation

Presentation of evidenceDoes the client understand?

1 2 3 4 5

DB Transfers – Five best practice steps: Transfer requirements from 1 April 2018 to 30 September 2018

One Two Three Four FiveAnalysing the client’s needs Understanding the DB scheme Producing reports Comparison of benefits Preparing your recommendation

What does an adviser require to analyse the client’s needs?

What evidence does an adviser need to collate?

Produce transfer value analysis service (TVAS) report

The need to adopt a compare and contrast approach – FCA guidance Suitability

FCA guidance says whether to transfer is highly dependent on the client’s individual circumstances.A DB transfer should be viewed as part of a wider, full financial planning service: Fact find Attitude to risk (ATR) and capacity for loss

Tax situation of the client Income needs and objectives now and in the future

Sustainability of income Need for flexibility Capital requirements Death benefit requirements Lifetime allowance (LTA) implications Health and two year inheritance tax (IHT) rule

Scheme booklet Scheme rules Funding statement Transfer value statement Benefit statement Ability to make a partial transfer (in addition to any statutory right)

Information an adviser needs to identify: Benefit structure Membership details Scheme pension at date of leaving pensionable service and/or at the current date, broken down into its component parts

Pension commencement lump sum (PCLS) payable and any commutation factors

Revaluation rate in deferment for each component part of the scheme pension

Escalation rate during the course of payment of each component part of the scheme pension

Death benefits before and after retirement

Normal retirement date Early retirement options and benefit level adjustments

Is the scheme in danger of entering the Pension Protection Fund (PPF)?

What would PPF benefit levels look like for the client?

What data needs to be input? Personal and detailed information based on DB scheme data

Produce the report using the intended receiving scheme, investment choice and adviser charging structure

What does the report output tell an adviser? Annuity comparison

– Critical yield under current rules Drawdown comparison

– Cash flow modelling – Key features illustration needs to

matchRunning a protection quoteProducing an alternative life assurance quotation

Compare DB scheme benefits with alternative DC benefits. Income levels Income sustainability Timing of benefits Capital benefits Death benefits Tax situation

Identify any trade-off.Match to client’s ATR and capacity for loss.

Do not rely on standard terms and lack of personalisation.Advice needs to be clearly stated.Need to demonstrate that this is in the best interests of the client.Do not shape advice to fit a client’s wishes.Present evidence.Match the client’s needs to the evidence you have gathered.Does the client understand?Include ongoing reviews.

DB Transfers – Five best practice steps: Transfer requirements from 1 April 2018 to 30 September 2018

Key areas changed from 1 April 2018

One Two Three Four FiveAnalysing the client’s needs Understanding the DB scheme Producing reports Comparison of benefits Preparing your recommendationWhat does an adviser require to analyse the client’s needs?

What evidence does an adviser need to collate?

Produce TVAS report The need to adopt a compare and contrast approach – FCA rule

Suitability

FCA guidance says whether to transfer is highly dependent on the client’s individual circumstances.

A DB transfer should be viewed as part of a wider, full financial planning service:

– Fact find

– ATR and capacity for loss

– Tax situation of the client

– Income needs and objectives now and in the future

– Sustainability of income

– Understanding that risks are transferred from the employer to the individual.

– Need for flexibility

– Capital requirements

– Death benefit requirements

– LTA implications

– Health and two year IHT rule

If you cannot get the necessary information to assess suitability, you must not make a personal recommendation under suitability rules.

– Scheme booklet– Scheme rules– Funding statement– Transfer value statement– Benefit statement– Ability to make a partial transfer (in

addition to any statutory right)

Information an adviser needs to identify:– Benefit structure– Membership details– Scheme pension at date of leaving

pensionable service and/or at the current date, broken down into its component parts

– PCLS payable and any commutation factors

– Revaluation rate in deferment for each component part of the scheme pension

– Escalation rate during the course of payment of each component part of the scheme pension

– Death benefits before and after retirement

– Normal retirement date– Early retirement options and benefit

level adjustments– Is the scheme in danger of entering

the PPF?– What would PPF benefit levels look

like for the client?

What data needs to be input?– Personal and detailed information

based on DB scheme data– Produce the report using the

intended receiving scheme, investment choice and adviser charging structure

What does the report output tell an adviser?– Annuity comparison – Critical yield under current rules– Drawdown comparison – Cash flow modelling – Key features illustration needs

to match

Considering alternativesAdvisers should consider alternative ways of meeting the client’s needs.

Compare DB scheme benefits with alternative DC benefits.– Income levels– Income sustainability– Timing of benefits– Capital benefits– Death benefits– Tax situationIdentify any trade-off.Match to client’s ATR and capacity for loss.

Understanding that risks are transferred from the employer to the individual.

Must be a personal recommendation.

Do not rely on standard terms and lack of personalisation.Advice needs to be clearly stated.Need to demonstrate that this is in the best interests of the client.Do not shape advice to fit a client’s wishes.Present evidence.Match the client’s needs to the evidence you have gathered.Does the client understand?Include ongoing reviews.

Pension transfer specialist (PTS) checking

Check the entirety of the advice process, not just the numerical analysis.Confirm the recommendation is suitable.Inform the firm in writing before the report is given to the client.Any disagreements between the PTS and the adviser must be settled before the client is given the suitability report.

DB Transfers – Five best practice steps: Transfer requirements from 1 October 2018

Key areas changed from 1 April 2018 Key areas changed from 1 April 2018

One Two Three Four FiveAnalysing the client’s needs Understanding the DB scheme Producing reports Comparison of benefits Preparing your recommendationWhat does an adviser require to analyse the client’s needs?

What evidence does an adviser need to collate?

Produce the Transfer Value Comparator (TVC) and the Appropriate Pension Transfer Analysis (APTA).

The need to adopt a compare and contrast approach – FCA guidance

Suitability

Whether to transfer is highly dependent on the client’s individual circumstances – FCA guidance.DB transfer should be viewed as part of a wider, full financial planning service:– Fact find– ATR and capacity for loss– Tax situation of the client– Income needs and objectives

now and in the future– Sustainability of income

– Understanding that risks are transferred from the employer to the individual

– Need for flexibility– Capital requirements– Death benefit requirements– LTA implications– Health and two year IHT rule

If you cannot get the necessary information to assess suitability, you must not make a personal recommendation under suitability rules.

– Scheme booklet– Scheme rules– Funding statement– Transfer value statement– Benefit statement– Ability to make a partial transfer (in

addition to any statutory right)Information an adviser needs to identify:– Benefit structure– Membership details– Scheme pension at date of leaving

pensionable service and/or at the current date, broken down into its component parts

– PCLS payable and any commutation factors

– Revaluation rate in deferment for each component part of the scheme pension

– Escalation rate during the course of payment of each component part of the scheme pension

– Death benefits before and after retirement

– Normal retirement date– Early retirement options and benefit level

adjustments– Is the scheme in danger of entering the

PPF?– What would PPF benefit levels look like

for the client?Re-emphasis that any presentation of PPF benefits must be clear, fair and not misleading, as must all client information.

What data needs to be input?– Personal and detailed information

based on DB scheme data.

– Run on generic assumptions prescribed by the FCA

Highlight the need for accuracy with two reports for the same client.

Appropriate Pension Transfer Analysis (APTA)Must be personalised to the client, DC scheme and investmentsCritical yieldDrawdown comparison– Cash flow modelling– Key features illustration needs to match

Plan for a reasonable period beyond average life expectancy.

Considering alternativesAdvisers should consider alternative ways of meeting the client’s needs.

Assess impacts on state benefits.

Compare DB scheme benefits with alternative DC benefits.– Income levels– Income sustainability– Timing of benefits– Capital benefits– Death benefits– Tax situationIdentify any trade-off.Match to client’s ATR and capacity for loss.

Understanding that risks are transferred from the employer to the individual

Must be a personal recommendationDo not rely on standard terms and lack of personalisation.Advice needs to be clearly stated.Need to demonstrate that this is in the best interests of the client.Do not shape advice to fit a client’s wishes.Present evidence.Match the client’s needs to the evidence you have gathered.Does the client understand?Include ongoing reviews.

PTS checkingCheck the entirety of the advice process, not just the numerical analysis.Confirm the recommendation is suitable.Inform the firm in writing before the report is given to the client.Any disagreements between the PTS and the adviser must be settled before the client is given the suitability report.

Please remember that past performance is not a guide to future performance. The value of your client’s investments may fall as well as rise and they may not get back what they put in.

This document is based on Quilter International’s interpretation of the law and HM Revenue & Customs practice as at July 2019. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.

The value of any tax relief will depend on the investor’s individual circumstances.

www.quilterinternational.comCalls may be monitored and recorded for training purposes and to avoid misunderstandings.

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18189/INT20-0984/February 2020