Turbulent times means sound DB advice has never been more important
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The market is in unprecedented turmoil: in his first week as Governor, Andrew Bailey cut interest rates to 0.1%. In his first two months as Chancellor, Rishi Sunak has released over £300bn of funds to help the economy. Global indices have fallen sharply. Numerous property funds have been suspended.
No one could have predicted this in December.
It’s not easy being a financial adviser. Yet, in these challenging times, people need good financial advice more than ever. Your clients are more likely to vulnerable at the moment. Many will have seen their income crash and significant falls in their assets, all while being consumed in worry about their loved ones.
For those lucky to have a Defined Benefit pension, they’ll have seen the value of their pensions increase through the turmoil.
But, the 64 million dollar question is: what does the future hold?
The reduced interest rates will almost certainly lead to increased transfer value in the months ahead. Does this mean you should wait for clients to get new transfer values?
Will equities markets fall further? It is likely that there will be a bull market when medical advances help to reduce the threat of the virus, but when will that be?
A crystal ball would certainly come in handy right now!
For many, their defined benefit scheme is their biggest financial asset. FCA research showed that the average transfer value is over £350,000. That is more than the average property price in the UK. Due to Pension Freedoms, it’s a lot easier to take benefits from a Defined Contribution scheme. For people suffering current hardship, it’s only natural for them to consider transferring to access their funds.
This is where you really need to pass on your enhanced knowledge and understanding of the financial system. Clients may want to transfer in the coming months more than ever, but in the majority of cases it’s still unlikely to be in the client’s best interest in the longer term.
Of course, there will still be many times where it is still in their best interest to transfer. In my time at the regulator and as a consultant, I’ve reviewed some transfer advice that has been fantastic for clients and their families. I’ve seen recommendations that include stress testing similar to the market shock we are experiencing and have demonstrated the transfer is still likely to be the best option for the client.
As ever, the key is to get a good understanding of your client’s circumstances and objectives. Undertake an analysis of their Defined Benefit scheme and compare it against alternative schemes. Consider other options to meet your client’s objectives. Undertake cash-flow modelling, including stress testing. Make sure clients are clear on the risks, including investment risk.
The support and advice you can provide your clients can be invaluable. In these uncertain times, it’s even more crucial to pass on your knowledge, provide expert guidance and ensure good outcomes for your customers.
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