FOR INVESTMENT PROFESSIONALS ONLY
Members of DC schemes have long held automatic rights to select ARF options regardless of the DC product(s) in place at time of exercising the option. As such, the denial of the same options has been a significant problem for former DB holders looking to achieve the best outcome for their funds at retirement. The restriction meant that affected clients (often those whose DB entitlements had been forfeited on scheme wind up) who wished to access their retirement lump sum were forced to use their remaining funds to purchase low rate annuities during a period of record low interest rates.
Now that the problem has been resolved, it is worth reviewing the main client types affected and some of the considerations for discussion.
Clients over the age of 50 will be most interested in this change. In general, these clients have left service with their previous employers and early access options are now available to them. Annuity purchase is now no longer a requirement and as a result immediate or early benefit access, particularly lump sums, may be worth a meaningful discussion.
Most clients in this category will no longer be employed by the company that provided the benefits, but they have chosen to leave their deferred benefit entitlement preserved until retirement age in the original scheme. When the decision was originally made, the ARF option was not available for consideration. The expectation was probably that the DB scheme would be in place at normal retirement age (NRA) or on earlier retirement. As a result of the extension of the ARF option to Buy Out Bonds and the continuing closure rate of DB schemes, a re-evaluation of the potential transfer choices may be timely.
The main group of clients in this category will be executives approaching retirement in well-funded DB schemes. These clients may not need a guaranteed lifelong pension and may prefer the concept of taking control of their retirement funds as assets on the family balance sheet. A lump sum conversion of 25% is often appealing when transfer values are attractive, especial in a low yielding bond environment. The important point for these clients is that a transfer to Buy Out Bonds as part of exit strategy will now create ARF planning options not readily available before the recent announcement.
The checklist below combined with the recent benefit and transfer value statement may prove useful in helping clients formulate the most suitable plan for their retirement funds:
Until now, most pension clients who were not entitled to consider ARF options had little scope to formulate a plan for their retirement funds. The only real options were to hope to live for a long time in receipt of defined benefit pensions or to live frugally on annuity income. Now the rules have changed, advisers have the opportunity to revisit the affected clients and highlight new opportunities. The change has created the opportunity to explore the new dimensions of retirement planning provided by the availability of the extended ARF options.