Defined benefit transfer at 57 with a large cash equivalent value
Mr Patel is 57 and has a deferred defined benefit pension from a former employer. The scheme pays £24,000 a year from age 65, increasing by RPI up to 5% a year. The cash equivalent transfer value is £465,000. He wants to transfer to a SIPP so he can retire at 60, take 25% tax-free cash and draw £30,000 a year. He has £80,000 in savings, no mortgage, and a wife aged 55 who earns £22,000. He has high blood pressure and a family history of heart disease. He says he understands investment risk and is willing to accept it. The advising firm holds the pension transfer specialist permission but has a contingent charging model. Mr Patel has signed an expression of wish naming his wife. He is adamant he wants the transfer.
1. Outline the advice process the firm must follow before any transfer, including abridged advice and the role of the pension transfer specialist.
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The firm must follow the FCA's advice process for safeguarded benefits.
- Establish the client's needs: income at 60, tax-free cash, wife's income, health, other assets, attitude to risk, capacity for loss and willingness to bear risk.
- Give risk warnings: the DB pension is a secure, inflation-linked income with a spouse's pension; the transfer value is not a cash sum to compare with the fund.
- Offer abridged advice first. This is a simplified process with two outcomes: it can advise not to transfer, or it can say that full advice is needed. It cannot recommend a transfer.
- If full advice is needed, a pension transfer specialist must compare the DB benefits with the proposed SIPP, including critical yield, charges, investment risk, tax-free cash, death benefits and alternatives such as early retirement from the DB scheme.
- Contingent charging is banned. The firm cannot charge only if the transfer goes ahead.
- Document the advice and the client's decision.
2. Assess whether the transfer is likely to be suitable, giving reasons.
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The transfer is likely unsuitable.
- The DB pension pays £24,000 a year from 65, increasing by RPI up to 5%, with a spouse's pension. That is secure for life.
- The CETV is £465,000, a multiple of about 19.4 times the pension. That is not obviously generous.
- To draw £30,000 a year from 60, plus take 25% tax-free cash, the SIPP would need a high and sustained return. At 60, the money must last perhaps 30 years, and charges and poor returns could exhaust it.
- He has high blood pressure and a family history of heart disease. He may value security and may not have the capacity for loss.
- His wife earns £22,000 and needs income if he dies. A SIPP death benefit is not the same as a spouse's DB pension.
- He wants tax-free cash, but that is a red flag, not a reason to transfer.
The starting presumption is that a DB transfer is unsuitable. The adviser should recommend keeping the DB pension and consider taking it early or using savings.
3. What should the firm do if Mr Patel insists on transferring after being advised not to?
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If he insists, the firm can treat him as an insistent client, but it must not simply process the transfer as if it were advised.
- Confirm he has capacity and understands the risks.
- Give clear written risk warnings and explain that the advice is not to transfer.
- Check whether the firm's permissions and procedures allow execution-only DB transfers. Many firms decline.
- If the firm proceeds, it must still use a pension transfer specialist and document why it is acting on client instruction.
- Do not use contingent charging or any arrangement that rewards the transfer.
- Consider whether his health or pressure from others makes him vulnerable.
- Tell him he can complain to the firm and the Financial Ombudsman Service.
- If the firm is not comfortable, decline and let him seek another adviser.
The firm should not transfer without a clear, documented client instruction and senior sign-off.