Why final salary pensions might not be your best bet for retirement
Another big date in the calendar – Monday, 1 October 2018. Now you might sit and scratch your head at that one. Don’t worry, I’ll forgive you if you didn’t spot it. This was the date the Appropriate Pension Transfer Analysis (APTA) was established. Let me explain...
If you were fortunate enough to have been offered one, you may be entitled to a final-salary pension from your employer at retirement. While the thought of receiving a guaranteed income for life was appealing to many, the changes to pension legislation have given retirees far more flexibility in how they draw their pensions. Rather than receiving a fixed income in a final-salary scheme, they have the option of transferring out into a flexible pension where they can draw funds as needed.
The pull of a transfer was strong for some, so strong that more than 100,000 people did just that in 2017, according to the FT Adviser website. But was it for the right reasons?
The much-criticised Transfer Value Analysis (TVA) played a key role in assessing the suitability of a pension transfer. Some commentators have suggested that the TVA failed to take account of an individual’s circumstances or objectives – they felt it was all a bit impersonal.
Criticism has also been levelled in the wake of the British Steel transfer saga, which saw close to 8,500 pension members transfer out of its final-salary scheme, perhaps without a proper appreciation of their specific situation and the benefits being sacrificed.
This has been addressed with the introduction of the Transfer Value Comparator and an Appropriate Pension Transfer Analysis or, as they will commonly be referred to, TVC and APTA – oh, we do love an acronym.
The TVC analyses the transfer value offered by a proposed pension scheme against the estimated total value required to replace the client’s final-salary pension income via an annuity purchased from an alternative pension arrangement. However, the TVC only provides a generic estimation.
“But you mentioned APTA”, I hear you say. Indeed, I did and this is where it all gets that little bit more personal.
Details such as marital status, taxation, health, objectives and needs, to name a few, are all taken into consideration here, which will help position the TVC in relation to the client’s particular circumstances.
Greater emphasis is placed on understanding the individual and their requirements, digging deep to advise and using clear and coherent client information. A welcome change, I think you’ll agree - particularly with the British Steel episode fresh in everyone’s mind.
When we move past all the baffling jargon and acronyms, it all boils down to one thing – you. By understanding where you are in life and taking the time to listen to what you want, we start to write on the same page.
A crucial part of this is breaking down the barrier that seems to exist between finance and our clients, educating them and sharing our knowledge to help them make better informed decisions. It is something our advisers do well at AAB Wealth.
It’s a key reason why we’ve enhanced our triage process around final-salary pension advice with our Money Advice video series. We avoid any unconscious bias and share neutral knowledge on final-salary schemes –the who, what, where, when, and why.
We help you understand the steps you’re taking and the potential implications of staying where you are or transferring away. Only then will we engage, knowing you are clear about the road that you are going down.
Cashflow modelling plays an important role as standard, taking your financial information and showing you the changing flow of money over your lifetime, using colourful and engaging content.
It tends to be the part clients find most interesting – who wouldn’t want to see what their financial future might look like? We consider it to be invaluable stuff.
So while there is a long way to go, I believe the APTA changes strengthen our position as responsible advisers, seeking to serve our clients better. It might not be perfect, but it is a step in the right direction. One that we are taking with two feet.
Fraser Porter is chief executive of Anderson Anderson & Brown Wealth