Nick Rippon
Financial planner, Rippon Financial Management
We use O&M Pension Solutions for critical yield calculations [the investment return required to equal income from a defined benefit (DB) scheme]. This gives us a transfer value analysis report, which we use to build into the initial advice.
Consider other issues
Critical yield is an important factor in transfers, but it has to be proportionate to other factors. A low or high critical yield is irrelevant if you have a client in ill health or a significant objective is to leave death benefits to children.
We have a client currently who has remarried and has three children with his previous wife. His existing DB scheme will provide his existing spouse with a 50% pension but his children will get nothing. He has a transfer value of £1.5 million. If he transfers he can leave his children a significant sum, so the importance of the critical yield is watered right down.
No strict rules
We do not have strict ground rules. However, a transfer will be unlikely if the critical yield is 9%-10% or more. There would have to be consideration about the objectives that can be met for the client.
The idea the Financial Conduct Authority is trying to get across is you cannot put a definite value on a transfer. The reality is, when you have a client who has had three heart attacks and smokes 50 cigarettes a day, and wants to leave death benefits and wants access to his money, you may still consider a transfer at 15% critical yield.
Rod Milne
Managing director, HFS Milbourne
Our starting point is we should not transfer because of the loss of guaranteed benefits, and we work from there. The critical yield is one of the factors in our working from that point. For our calculations we use Selectapension.
Make exceptions
We had a case recently where the critical yield was in double digits and ordinarily you would not do that transfer. But the client had only one asset, his pension, and his business was going bust, with HM Revenue & Customs chasing him over it. If he had not got access to his DB pension, he may have gone under.
However, overall we turn down more DB transfers than we take on.
Protect yourself
We have a charging structure that tries not to show any bias towards recommending a transfer. So we carry out two reports with the client.
The first is a report to say whether or not the funds should be transferred out of the scheme or not. If the answer to that is yes, we would then do a second report saying where the transfer should go and we charge a fee for both reports. This is an extra layer of protection in the event there was a claim, because having two reports you charge for separately shows you did not have a preconceived notion that you were going to do the transfer.
If we write a report that recommends not to make the transfer, but the client is insistent that they want to do it, we tell them to go elsewhere.
Julie Lord
Chief executive, Magenta Financial Planning
The whole thing about pension transfers is it depends on so many different variables and as an adviser you need to have all your ducks in a row and the case for the transfer absolutely has to be in the best interests of the client.
Fee factor
We introduce the critical yield right at the outset. Because we charge fees for the process we tell the client that we are not going to carry out the transfer without first getting the critical yield.
We outsource our critical yield calculations, but there are other things to look at. One such consideration is the security of the DB scheme; is the company going to go bust? Also the client’s individual situation as far as their health is concerned: clearly it could make sense to have all the money today if they are going to die next week.
If someone has a critical yield of say 9% it would not stop us doing a transfer, just because it is over a certain number.
Make a cashflow plan
I do not really see how people can make DB transfers without first doing a proper cashflow planning forecast, as the two go hand in hand.
If a client needs a big injection of capital to be able to achieve their goals and can only do that through a transfer then that calculation is a massive consideration.
THREE TOP TIPS
- Nick Rippon: Do not set down absolute rules for the critical yield.
- Rod Milne: Conduct two reports to avoid bias from contingent charging.
- Julie Lord: Embed your critical yield calculations in cashflow modelling.