Have you pointed out to the client that by leaving early there could be a substantial loss of cumulative income e.g. £20,000 reduced by £5,000 could lose £100,000 over an average life expectancy?
Does the client acknowledge and accept this? Were alternate sources considered to fund the gap? Why were they discounted and was it better to lose the lifetime income and take on the risk?
6. Tax free cash
Usually, the available tax free cash may only be taken in full when the client takes their DB scheme benefits. Within a DC arrangement the client can decide to phase the payment of the tax free cash by only crystallising the funds required to generate the necessary lump sum.
This ability to phase may be useful for those who may have an IHT liability and would prefer the lump sum to be in an IHT-friendly place.
The maximum allowed cash from a DB scheme is broadly 25 per cent of the amount being crystallised. However, transfer values are usually higher than the amount crystallised in a DB scheme and as such the tax free cash available post transfer can be much higher. On the face of it more tax free cash is good.
Why is it good? Is there an actual capital need that this level of cash is satisfying? If not, is it worth taking on the risks for something you don’t need?
7. Death benefits
DB death benefits, especially for deferred members, are generally poor in both value and who can receive them. Being able to leave a large legacy on your death to your loved ones is attractive.
Equally, post pension freedoms, DC death benefit taxation is much less penal and you can also pass your pension onto non-dependants. Many clients will be attracted to this.
Have you ruled out alternative ways of leaving a legacy i.e. protection policies? Does the family actually need the money? Should the client’s need for income security not be more important than leaving a legacy to loved ones?
8. Health
DB schemes don’t consider health/lifestyle issues when establishing the level of pension income. It’s entirely possible the client could buy a guaranteed income for life of a higher amount outside the DB scheme with an enhanced/impaired life annuity.
Likewise, the client’s health situation may indicate shorter than normal life expectancy so with longevity risk reduced, a higher income could be enjoyed following a transfer.
Evidence of the former is easy but the latter should also be covered. What is the client’s health history?
People generally understate life expectancy so does your file have reasonable proof of this expectation of shortened life expectancy?
