DIY Investor Magazine
|
June 2017
52
IN THE WEEDS
Without specialist advice many see only a binary choice
between DB guarantees or DC non-guarantee; this does
not have to be true - a short term (guaranteed) annuity
(purchased with part of a DB transfer) can be used to
bridge the income gap to state pension age, or secure a
guarantee of nil rate income tax band for non-earners.
There is a rising demand and development in the
annuity market (long term guarantees up to 30 years)
which offer valuable protection (built in death benefit).
ANYTHING ELSE?
Other reasons for transferring away from a DB Scheme
might include:
•
Desire to change retirement date (earlier or later)
•
Need to provide for a different range of dependants
(or none)
•
Desire to change tax position / tax free cash amount
•
Need to change inflation / escalation rate on
pension
•
Need to meet a changing work pattern (part time)
•
Desire to access lump sum, no income
•
Someone in poor health able to secure an
enhanced annuity
•
Access lump sum and pass effectively onto heirs
Reasons to remain include the loss of a ‘guaranteed’
pension, the risk of poor investment returns, poor
transfer value relative to pension deferred. The fact that
this may be the only / main source of retirement income
would also mean careful thought and consideration is
needed before embarking on this route.
SOLUTIONS
Any DC replacement for DB benefits should pay
attention to the following investment criteria:
•
Strategic asset allocation (and risk profile) to deliver
inflation protection (growth and drawdown)
•
Diversified asset mix in the growth phase to
maximise risk adjusted returns
•
Assets matched with the long-term income liability
(e.g. selling low risk assets first and having a
growing percentage of equity assets over time)
•
A cash buffer (in drawdown) to mitigate against
‘sequence of return’ risk
•
The impact of all costs – funds, dealing, platforms,
tax wrappers and advice
•
Time horizon for the growth and drawdown stages
•
Tax management strategies to minimise losses from
taxation
•
The need for regular review
All these point to the critical importance of specialist
professional advice – both in the transfer decision
and on an ongoing basis. Indeed, any DB transfer
over £30,000 is required to be ‘advised’ by a suitably
qualified adviser.
SUMMARY
Moving from DB to DC is not solely a pure investment
decision, but the investment case of aligning an
individual’s assets to provide a long-term income liability
by investing in real assets is strong.
Even when critical yield calculations are not favourable
a client need for flexibility (type, date, style) of income,
varying death benefits, ability to work part time, to enjoy
a period of travel in good health, to fund children’s
education / house purchase, to repay debt (an
important ‘mindset’ move into their retirement phase),
the interaction with future equity release from a main
residence, other invested assets or simply to enjoy the
lifestyle they have been working towards for 40 years
may be compelling.
Armed with a professional financial adviser (coach),
a low cost well diversified portfolio and a sensible
approach to investment and income provision, the
opportunity presented by all-time high CETVs make a
transfer a once in a lifetime opportunity.
With thanks to Janice Russell, Specialist Pension
Adviser at Russell Retirement Solutions for her valuable
input.
MANY WILL SEE GREAT VALUE IN ‘PERSONAL
OWNERSHIP’ OF THEIR PENSION’
