ADDITIONAL FACTORS TO BE CONSIDERED WHEN ADVISING ON A DB TRANSFER

Question 1

ATTITUDE TO INVESTMENT RISK

Answer 1

The degree of uncertainty a client is willing to accept with their investment returns in the hope of achieving a higher return

FCA concerned relying on questionnaire clients may just choose middle answer

Some providers check consistency of answers

IFA will need to discuss this with clients

Reinforces know your client

Question 2

CAPACITY FOR LOSS

Answer 2

The clients ability to absorb falls in the value of their investment while still meeting their investment objectives

Question 3

FACTORS for CAPACITY FOR LOSS

Answer 3

Age and proximity to retirement

Number of dependants

Health and family longevity

income needs split by essential / discretionary

Capital expenditure required

Other financial objectives

Any debt o/s including mortgage amounts / term

Other investments that could provide income

Any secure income such as level of State Pension

Question 4

SUSTAINABILITY

Answer 4

How much income is drawn from the funds

How long the income is needed

A SAFE WITHDRAWAL RATE needs calculating and longevity risk needs to be assess

Defined as quantity of money expressed as a percentage which can be drawn each year for a given period of time with 95% probability

Should depend on risk profile and time period

Question 5

LONGEVITY RISK

Answer 5

Defined as the client living longer than anticipated

Three FCA causes outlined for not understanding

UNCERTAINTY - Average mortality produced by ONS relates to someone in normal health
Life expectancy improved by receiving a high level of income
Calculators available to tailor to client’s individual circumstances
Clients opinion tends to underestimate longevity

Question 6

INVESTMENT RISK

Answer 6

Volatility

Sequence of Returns Risk

Inflation Risk
Risk that investment does not keep pace with inflation