These three tips are great discussion points and give you a good opportunity to flush out your client’s views and their attitude to the risks that a defined benefit (DB) transfer presents – risks that they have probably never had to consider before or manage. Make sure you get these views recorded and on file.
Tip one – longevity risk
You need to be able to demonstrate that you have spoken to your clients about longevity risk. It is great if you can refer to some statistics or use a tool for this and, fortunately, the Office of National Statistics has a pension calculator. You can also search ‘ONS how long will my pension last’.
The tool allows you to specify the age and sex of your client to produce the graph you can see below. You get the average life expectancy but also handy stats about living longer. Here, you can see that a 65 year old has a one in four chance of living to age 94 and a one in 10 chance of living to 99.
This is a simple tool that only takes seconds to personalise for a client.
Tip two – income needs
You need to make sure you have had a detailed discussion about income security. If you think back to the pre freedom and choice days, you couldn’t access full flexibility unless you had at least £12k per annum in guaranteed income for life. That could be an excellent benchmark to consider testing your client against. The FCA is very concerned when a client gives up a guaranteed income for life and has no or very little secured income going forward. They are more comfortable if there is a safety net in place following the DB transfer to ensure the client is protected. That could be DB pension from another source, for example.
Tip three – withdrawal rates
There is a lot out there right now about sustainable withdrawal rates and what level is the best level. Some very clever mathematical minds are trying to work out the absolute best sustainable withdrawal rate. For a discussion with your clients, you can look at this slightly differently and possibly more simply: how much is too much?
If we take the example of a 65 year old man and refer to the capped drawdown GAD rate and best buy annuity rate:
Example 65 year old man
- GAD rate £5,100 per £100,000*
- Best buy annuity rate £5,455 per £100,000**
* GAD rate based on May 2018 calculation using 1.75% gilt yield
** Source: William Burrows best buy table, age 65, single life, 5 year guarantee, level
We can see that 5.0% to 5.5% total withdrawals are a good benchmark. If your client needs to drawdown more than this (including all charges) from their fund then you can challenge whether that income is too much.