Defined Benefit Transfers and Investment Income
- Date: 02/03/2017
What we are finding with Defined Benefit (DB) transfers at the moment is that our advice to affect the transfer is being driven by specific client circumstances and requirements, so whilst the critical yield is important, it is never the decisive driver. Hence our investment parameters are rarely, if ever, driven primarily by the need to match a critical yield. Whilst I see the logic it does strike me as a bit “cart before the horse”. If the justification for the DB transfer is tied up in the investment income and return, I think we would be quite uncomfortable allowing the transfer in the first place, hence we don’t then mess with what we would ordinarily be comfortable with in terms of income provision unless in exceptional circumstances pertinent to a particular client
Hopefully an example of one of the transfers that we have undertaken serves as an illustration.
Our cash flow modelling showed a client of ours has sufficient capital, outside of pension provision, to meet his families required income needs for the foreseeable future. He is a sophisticated individual. His DB pensions are part of a suite of pensions provisions he has accumulated over the years. The DB’s are relatively small in comparison to his own affairs but are still significant and in the space of just one year he has seen the CETV of these pots increase by about 35%. He has a wife, children, grandchildren and a considerable estate.
His objectives are to ensure that he and his wife are comfortable in retirement but as we see with many of our senior clients, he is not thinking of a traditional retirement any time soon. Given his own financial security, planning for the financial security of his wife and family has become a key objective. Pensions freedoms means that his wife can inherit any transferred pension pot and even better so can the children and the grandchildren in a very tax efficient manner. The guaranteed income of the DB scheme and the widow’s benefits will NOT ever be required to meet his or his wife’s day to day living expenses. In this case critical yield was assessed as much to understand the pure financial merits of the transfer as to gauge the chances of replacing the DB income, as replacement income was not the client’s requirement. Therefore in this case an apparently high critical yield may still have made the transfer of the relatively small DB schemes to a personal pensions arrangement suitable, and provided the client and importantly for him, the knowledge that these amounts will in all likelihood pass to his widow in its entirety and down to his children in a highly tax efficient manner. This investment then sits alongside his other investments and income provision using the division of equity, fixed interest, property and other assets merited by his particular risk profile.
We are not producing a quasi-annuity type income – and it would worry me if others were trying to boost income yield through the purchase of fixed interest, particularly where we may well be in the income cycle.
So in summary, the critical yield is an important check in these circumstances but for Thomas Miller it is the client’s financial circumstances and specific objectives that are the driver for our advice on transfers.
Article first appeared in:
New Model Adviser (2nd March 2017) in print.
Opinions, interpretations and conclusions expressed in this document represent our judgement as of this date and are subject to change. Furthermore, the content is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or a solicitation to buy or sell any securities or to adopt any investment strategy.
Thomas Miller Investment is the trading name of the businesses in the Thomas Miller Investment Group. This note has been issued by Thomas Miller Wealth Management Limited which is authorised and regulated by the Financial Conduct Authority (Financial Services Register Number 594155) and is a company registered in England, number 08284862