Earlier this week I was asked to pen a few words for New Model Adviser on a “hot topic in the advice world”. It took less than a minute to decide I would write about the sensitivities around Defined Benefit (DB) pension transfers. Time and again this topic crops up in my discussions with advisers, and our DFM partners.

Advisers right across the UK are questioning ‘do I’ or ‘don’t I?’ and ‘is it worth the risk?’. Many have seen an influx of enquiries as consumers weigh up whether to stick with their current DB scheme (with a guarantee that may not be met by the sponsoring employer) or transfer a lump sum to a flexible vehicle like a SIPP, where the pension capital can also be passed to their estate.

I recently caught-up with Robert Clark of RC Brown and we discussed the issues around DB transfers, albeit from a very different angle. Robert himself, and his wife Carol have just transferred out of a DB scheme.

The conversation got me thinking: how does a decision such as this impact the end consumer? In fact, when it comes to advising clients faced with a windfall or ‘sudden wealth’ scenario, what is their thought process and the emotional journey they are likely to go through?

In this post, I have tried to capture Robert and Carol’s story, with the view to shedding light on the consumer journey. I hope it is useful to those of you advising clients in similar scenarios. If you prefer, the sentiment of this article is summarised in Robert’s short video below.

Watch the video (it’s 1:21 minutes)

 

Robert and Carol’s ‘windfall’

Early on in their careers both Robert and Carol worked for a large multi-national firm with a final salary scheme. The scheme closed in the late 80s, and as is the case with DB arrangements, neither of them had paid any money in.

At retirement, it was estimated that the scheme would pay a combined annual income of around £35,000. A nice sum to live on if they elected to stay with it. The alternative: a cheque for £1.2 million now. They decided on the latter.

It turned out to be a very emotional decision process, although after weighing up their options with the help of a trusted Adviser friend (as RC Brown do not have their own), they decided this was the approach they preferred. A SIPP would give them greater flexibility, particularly around the timing of when they want to (and can) do things.

While the risk is that their pension pot could shrink between now and when they retire, the transfer means that they can bring their plans forward. What would have been a ten-year time horizon has been cut to just a couple of years. Add to this the inheritance tax benefits and without a doubt this transaction is life changing.

In Robert’s own words:

“The decision was quite an emotional one and really got us thinking about the future. We thought ‘we didn’t pay into this scheme, and now we have a windfall, how can we use it to ‘do good’?”.

This prompted them to rewrite their Wills. Previously, as is often the case with a married couple and no children, they were the beneficiaries of each other. Now, after careful consideration their Wills cover a spider’s web of people. Indeed 20% of their wealth will be divided between non-family members.

They both feel like they have better clarity around who they are what is important to them. And wherever possible they want to take the opportunity to ‘give back’. As an example, Carol and Robert previously lived in Cyprus and made life-long friends with a family whose twin daughters plan to come to the UK for university education in 5 years time, they can now help them to fund it.

Robert said:

“I thought this would be an easy / binary decision, having been in the financial services industry for 30 years. What I didn’t appreciate was the emotional aspects around receiving a sudden windfall. It made us think long and hard about the things that matter most, including our own values and how we want the money to be used. These decisions weigh on your mind and can bring a certain amount of pressure.

 

Working with a financial adviser with a full understanding of the emotional journey of this experience, and the impact on a client’s life, really makes a difference. Support throughout the process, and not just by way of financial advice but also being given time and space to think, is key.”

Where financial advisers can add the most value

Delivering financial services can often be very process and compliance-driven. It’s the human touch and connection that clients value most. I call it ‘H2H’ (not B2B or B2C but Human to Human). Rather than only considering the financial implications of a decision such as this, taking a step back and appreciating the emotional journey can only lead to better outcomes. And a higher level of client engagement.

This is where I believe financial planners add the most value: building genuine, long-term and trusted relationships that last through the generations.

It surprising how many friends I know who, having been through the financial planning process, comment that they have never been asked such detailed questions about their life. And specifically, about the things that matter most.

It’s funny. Whenever I catch-up with Robert I get the sense that RC Brown is a firm that really cares about the people they deal with. They operate like a small family practice, where everyone is ‘in it together’. Robert asks questions about what’s happening in our world and sincerely cares about our answers, even offering to help wherever they can (completely outside of investment management).

I’m glad Robert shared his story and the positive benefits to him personally. It certainly brought a more human element to my thinking around DB pension transfers and the issues faced by advisers when advising in this area.

If you have any comments please post in the space below.


This article was created for the DISCUS website to share insights from RC Brown Investment Management. If you would like to find out more about RC Brown, please visit the RC Brown page on this site