Alistair Cunningham, FPFS
Mainstream media has a lot to answer for in whipping up a final salary frenzy. As I scroll through the headlines, and prose beneath, over the past
twelve months particularly, there is an overriding sentiment summarised in one particular headline:“Why now is the time to cash in your final salary pension”
As a financial adviser, I start with two basic principles; firstly that it is not in most people’s best interest to give up the guarantees provided
by a final salary scheme, and secondly that values are not 'high'. There is no right time to cash in a final salary pension - cash equivalent transfer
values are necessarily calculated to be actuarially fair.
When a new potential client gets in contact we explain our advice process and importantly before we give any advice, an explanation of how we work,
how we charge, and what they are looking to achieve. This first conversation, typically on the telephone, might take 15-30 minutes but we make
it clear there is no charge; we will not be giving any advice, we want to understand if we are in a position to help.
Reading between the lines we want to understand if this is an individual we can help, and importantly we want to help. Part of our role is to avoid
potential detriment and this is a time to weed out so called 'insistent clients'. We are frequently speaking to smart, well-informed and financially
sophisticated people. My view is these are potentially more dangerous than the less knowledgeable as they often have strong views on what is right
for them. Indeed, some of them resent seeking advice at all which was obviously mandated in the ‘Freedom and choice’ changes of 2015.
A common error is not understanding the basis on which a pension statement has been produced and how this relates to the CETV. It is still common that
pensions are only stated at date of leaving and if that was 10-20 years ago, which is often the case, the benefits are often in the range of 25-100%
greater. This could, for example move a perceived 50x multiple, which some media outlets have gleefully reported, to a more intelligible 30x multiple.
We are very careful not to talk about specific multiples as the huge range of different schemes using different anticipated scheme asset growth
rates, retirement ages, as well as a combination of benefits from 8.5% increasing GMP to benefits with no statutory deferment increases at all.
That being said, that the current open market option rates for a like-for-like income (an annuity) could require 40-50x, and often the aim of our
analysis and report is to explain the likelihood of getting to that target, or in the event this goal is not achieved (or is superseded by other
client objectives) the ‘cost’ of transferring out of the scheme. We move on to learn more about their objectives, and to discuss if they have thought
about other ways of achieving them. If they are in good health, they may well live to well beyond 90, and if there is a spouse, one or other might
be alive 40-50 years hence.
Is giving up a guaranteed income likely to be the best way to leave a legacy to children, and moreover is a legacy desirable or possible from a pension over this timeframe?
Our approach has been called by some ‘triage’, and we have not used this term but the goal is simple: we have an ethical duty to avoid charging
most clients a fee for what was evident at the outset, and to not act as a conduit for those who have already made up their mind and are not truly
seeking advice but simply a way to ‘sign-off’ their preconceptions. This approach is not unique to final salary transfers, but is part of a more
broad strategy to educate and clarify what we do and where we think we can (and cannot) add value. It is surprising how many individuals after
talking through options they had not considered or attached due weight, to actually engage us for advice but on a different topic to their initial