As financial advice is heavily reliant on the future, making a recommendation is usually a process of carefully weighing the specific (and potential) advantages and disadvantages, before reaching a decision on the best course a client should take with their finances.
However, on many occasions, I often find that the decision isn’t so clear-cut; there’s just too many variables and conflicting benefits and disadvantages to make a strong recommendation either way.
This isn’t so much of a problem for firms that rely on moving assets for their compensation (dare I say it, but the advice is likely to be nudged, or sometimes shoved, in the direction of moving the funds elsewhere).
When you charge an explicit fee for entirely unbiased advice however, it can sometimes create a dilemma. Just what should the recommendation be?
My own experiences of this problem have often been related to defined benefit schemes.
With the future outcome dependent upon so many variables and assumptions, and with the two main opposing options (investing funds with drawdown vs. contractually agreed scheme benefits) being so entirely different in structure, risk and flexibility, it’s left me wishing we could sit on the fence.
In light of the recent pension freedoms and the forthcoming second hand annuity market, may I suggest we consider another flexibility for pension savers?
Defined Benefit Scheme Pension Splitting
Basically, why should people have to make the outright decision between keeping their scheme benefits and moving to a defined contribution pension fund?
The decision is fraught and even with the most thorough advice, the outcome is simply far too uncertain to confidently make a recommendation one way or the other.
Why can’t clients get the best of both worlds?
Let’s say a person has a defined benefit scheme that offers a CETV of £500,000.
Perhaps schemes could offer a part CETV of £250,000, allowing the scheme member to obtain the flexibility, access and possible generational planning opportunities which come with the newer flexible pension structures, but critically, they maintain an element of pension income security for their retirement.
This could be especially useful for those who have larger defined benefit schemes. You could keep the DB scheme up to the income level that is protected by the Pension Protection Fund in the event of employer insolvency (providing a dual layer of contractual security), but move the residual funds to a more flexible alternative with investment into financial markets.
With defined benefit scheme advice currently being avoided like the plague in many advisory firms, perhaps allowing advisers to sit on the fence with our advice will help encourage further advice in this sector and lead to better client outcomes.
We are all schooled on the benefits of diversification. With many of our clients having a considerable amount of their retirement income linked to one contract and one employer, being able to split the contract and move part of it to an alternative source and format for providing retirement income could prove to be very prudent advice.