Pension Transfer Advice Process Chp. 2 Flashcards Preview

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What are the 6 essential steps in the advice process?

E = Establishing and defining the client relationship.

G = Gathering client data and determining goals and expectations.

A = Analysing and evaluating the client´s financial status.

D = Developing and Presenting the Financial plan.

I = Implementation of the recommendations.

M = Monitoring and Review.


What is the TVA?

“A TVA is the process of comparing the benefits being given up on transfer from a defined benefit scheme with those that could be provided by a personal pension or other scheme that provides flexible benefits.”

“However, with the introduction of pension flexibilities, the FCA has acknowledged that the TVA basis in its current format does not allow for an analysis which reflects the benefits that are now available to a client, and hence in PS18/6 the FCA stated that TVA is being replaced with the appropriate pension transfer analysis (APTA) with effect from 1 October 2018”


Be aware:

“The rule requiring a personal recommendation in all circumstances relating to defined benefit pension transfers is now in effect from 1 April 2018.”


Please note:

“The statement containing the CETV is called the statement of entitlement. This provides information about the transfer value being offered and will generally include the following:

Name and reference number of the member.
Date of joining the scheme.
Date of leaving the scheme.
The guarantee date.
The transfer value amount.
The amount of the transfer value that is guaranteed.
The deferred benefits that the transfer value is based on.
The normal retirement age.
The guaranteed minimum pension (GMP) age.
Details of the deferred pension.”


In the Statement of Entitlement....

The Defined Benefit could be broken down into its component parts.

“Pre-1988 GMP.
Post-1988 GMP.
Pre-1997 excess pension.
Post-1997 pension.
Bridging pension (if applicable).
Cash lump sum if not payable by commutation.”


What essential additional information could you need in addition to the CETV?

“The following list is a summary of the information you may require to carry out a transfer value analysis:

A full breakdown of the deferred pension at date of leaving. Each separate element of the pension scheme should be provided.
1. Details of all revaluation rates that apply to each element of the pension in deferment.
2. Details of increases that apply to each element of the pension once it is in payment.
3. Details of any discretionary increases that have applied/may apply.
Confirmation of whether the scheme has adopted CPI and the date from which this is effective.”
4. The basis of revaluation, i.e. whether it is applied in days and months or whole years.
5. The basis for a PCLS calculation , which is typically by commutation and whether post April 2006 rules apply, i.e. the scheme will offer the option of maximising PCLS up to 25% of the value of the ‘fund’.
6. Details of any protected tax-free lump sum, and any other transitional rights that may be applicable.
7. Cash commutation rates if applicable at both normal retirement date (NRD) and selected earlier retirement age.
8. The early retirement factors, applied to benefits revalued to NRD or an earlier retirement age.
9. Late retirement factors.
10. The earliest age that retirement benefits can be taken from the scheme without reduction.
11. Any protected early retirement age that may be in place.
12. If pre-88 GMP is included in the transfer value is it to be enhanced by a Limited Revaluation Premium (LRP)?
13. Has GMP franking been applied?
14. Confirmation of any lump sum benefits on death.
15. Is the spouse’s benefit based on uncommuted pension?
16. Pre- and post-retirement death benefits.
17. Details of the spouse’s pension.
18. Details of any dependant’s pension(s) and children’s pension(s).
19. The funding position of the scheme, along with details of any recovery plan in place.
20. The scheme status – open or closed to new members.
21. Active or deferred members.
22. Is the scheme about to be, or already in, the process of being wound up?
23. Has equalisation of GMP/NRAs occurred?
24. Does the scheme offer a partial transfer option?
25. Is pension increase exchange (PIE) available?”


What are GMPs?

“These are contracted-out benefits accrued before 6 April 1997. In return for reduced employer and employee National Insurance contributions, the trustees had to provide a minimum level of pension at least equivalent to the Additional State Pension that was given”


How are GMPs revalued?

1. Fixed Rate Revaluation.

“This is generally the most popular option as the ongoing liability can be accurately calculated. The rate is fixed at date of leaving and is applied to each complete tax year between date of leaving and GMP age”

2. Full Rate revaluation.

“GMP is revalued each year in line with national average earnings under section 148 (S148) orders (previously called S21 orders). There is no cap on the maximum rate of revaluation, therefore the ongoing liability is unknown.”


Retirement options be aware:

“The accrual rate will vary from scheme to scheme; the most commonly used accrual rates are 80ths for schemes that pay a pension and separate cash sum, and 60ths for schemes that offer a commutable pension. The benefits earned at date of leaving will be based on service and pensionable remuneration applied in proportion to the accrual rate of the scheme.”

“It is important to note that no element of GMP can be commuted for PCLS, therefore any GMP element might reduce the pension available for commutation.”


Spouse's pension ( a little bit more detail than you realise)...

“A spouse’s pension will generally be the main death benefit payable by a defined benefit pension scheme. This is usually expressed as a percentage of the member’s benefit. Where the member has left service, the benefit will be calculated as at date of leaving and will be revalued to date of death.
1. Definition of spouse – this most often means a husband or wife, and will usually include civil partners and same sex married partners. The scheme may, however, have its own definition and it is important to confirm what this is.
2. Same sex marriage and civil partnerships – trustees do not have an obligation to change the scheme rules to accommodate changes in legislation, therefore there is a possibility that the scheme may not pay a pension even where there is a legally defined relationship. Where the rules have been changed, there are some schemes that will only pay benefits effective from the date of the change in legislation.
3. Percentage of benefits – the percentage of benefits could be based on the pension before or after commutation. Based on the example above, if the scheme pays 50% of uncommuted pension this would be £6,250 per annum, regardless of whether a cash lump sum is taken at outset.
4. Reduction in benefits – the scheme trustees may retain an option to reduce or stop paying spouse benefits in certain circumstances, e.g. when the spouse is significantly younger than the member (usually ten years or more), or where the surviving spouse remarries or is cohabiting.
5. Other issues – some schemes may not pay a spouse’s pension where the marriage occurred after the member left service, is recent (say, within six months) or where spouses are not living together, even if they remain legally married.”

“Spouse’s and dependant’s benefits are provided at the discretion of the trustees and not as an absolute right.”


Lump sum Death Benefits...

“It is not common for schemes to pay lump sum death benefits to deferred members, as death-in-service benefits will cease when employment ends. However, there are occasions where a scheme may pay a lump sum death benefit.
A reduced lump sum death benefit may be payable to deferred members. This could be a multiple of pension, a fixed amount or a return of member contributions paid with or without interest.

Lump sum death benefits can be offered in addition to survivor pension benefits, however some schemes offer a lump sum alternative where there is no-one who qualifies for a spouse’s or dependant’s pension.”


Guarantee Periods

“In addition, the scheme may include a guarantee that the starting pension will be paid for a fixed period, regardless of whether the member survives or not. This is most commonly five years, but could be as long as ten years. This will be either paid as a continuation of the member’s pension to the end of the guarantee period, after which the payments would reduce to the survivor rate, or could be commuted to a lump sum and paid directly to the beneficiaries.”


The former role of TVAS...

“When carrying out an assessment as to whether a pension transfer is suitable for a client, it has long been a requirement that a comparison should be made of the benefits likely to be paid under a defined benefits scheme or any other safeguarded benefits, with the benefits that would be available on transfer to a personal pension or other scheme that provides flexible benefits. This process was known as a transfer value analysis (TVA), and was usually carried out using a transfer value analysis system (TVAS).”

“The main output of the TVA was the critical yield, i.e. the annual investment return, taking into account charges, required for a CETV to provide a capital sum equal to the capitalised value of the benefits provided by the scheme at the scheme’s normal pension age/at an age determined by the client.

Planners would then have used the critical yield produced by the TVAS to help them decide if a client should transfer their pension. For example, if a client had a very low attitude to risk but the critical yield generated by TVAS was 10% p.a. then a planner might have recommended that the client did not transfer their defined benefit pension.

However, due to the limitations of TVASs, the critical yield should only have been used as part of an overall assessment of suitability as a change in the assumptions used could have had a major impact on the critical yield required, and that even when the critical yield was achieved there was no guarantee that existing benefits would be matched, as for this to happen all assumptions would need to have been met identically.”

“Another problem with the TVA is that it was based on the client buying a secured income at a point in the future, which post pension freedom reform is highly unlikely. Furthermore, where a client wants flexibility with regards to when they access benefits and at what level they draw pension income, it is not possible to build this into a TVAS, therefore the critical yield alone should not have been used as an indicator of whether a client should transfer their pension.”