The FT Adviser have recently published this article written by our own Managing Director Tim Flippance.
Introduction
Of all the life stages where financial advice is vital for your clients, from purchasing a first property, balancing family costs with long term savings goals, retirement and beyond, ‘end of life’ advice is probably the least talked about – but also one of the most important. There may be understandable squeamishness – sometimes from all parties – however, once your client has had time to let bad news sink in and particularly where a terminal illness is advanced, their mind will no doubt turn to their financial affairs.
Where someone is unlikely to get close to normal life expectancy, the relative merits of a Defined Benefit pension providing a guaranteed lifetime income, must be considered very carefully.
The most common terminal illnesses are cancer, dementia (including Alzheimers disease), advanced lung, heart, kidney and liver disease and HIV / Aids. At any given time, millions of people will be living with these conditions. Survival rates, particularly for many forms of cancer and HIV/Aids, have mercifully improved substantially in recent years, thanks to advances in medical science. Nevertheless, according to cancer research UK, over 1,000 people a day in the UK is diagnosed with cancer alone.
It is therefore fair to assume that at some point, a large proportion of your clients will be faced with this scenario within their lifetimes. And those with a final salary scheme, either deferred or current, will need to individually weigh-up the advantages of a ‘guaranteed’ pension for life, because this will be much less clear-cut.
KYC and approaching health issues
It is firstly important to understand what ‘stage’ your client is at, post-diagnosis. You will particularly need to consider whether they have a reasoned grasp of their new circumstances and the longer-term implications; are they thinking clearly and coherently? What treatment are they receiving and what impact could it be having on them physically and mentally? What is their likely prognosis?
It is not unusual for clients faced with a terminal diagnosis to initially feel that they have either been passed a ‘death sentence’ – with only a limited time left to ‘say their goodbyes and put their affairs in order’, or at the other end of the spectrum, brush aside any concerns to instead assume they will be one of the ‘lucky ones’ who defy the odds.
However, with the guidance of medical professionals, most will ultimately realise that survival rates are a matter of statistical probability, and a realistic outlook and consideration of the risks is going to be vital when making decisions that will impact the rest of their lives.
With your help, the client can then hopefully start to consider their priorities. Typically, in relation to a DB scheme, these may include early retirement options if they wish to stop work (or have already done so), lump sum requirements potentially for those ‘bucket list’ activities and, for many, estate planning. It is vital that objectives are not merely a ‘shopping list’ of wants, but consideration is given to prioritising these and whether these are likely to change in the foreseeable future as circumstances change.
Family affairs
The involvement of immediate family can be met with some resistance as clients can often feel that this is ‘their pension and their choice’, however, this can be vital for a couple of reasons.
Firstly, decisions taken by the client can have a profound impact on what they ultimately ‘leave behind’. For example, the client may selflessly feel that they need to transfer their DB scheme to ‘maximise’ death benefits for their family in the form of a lump sum, but at the cost of their own, more immediate, needs.
Secondly, you will need to consider the potential vulnerability of the client and should always be on alert for this. Having a family member or friend present, who can provide perspective and support, can be helpful to assuage this concern for both parties. However, you should also balance this with the risk of the third-party potentially having a vested interest, where a potentially large pension CETV or severe ill health lump sum is involved.
Ultimately, you will need to satisfy yourself that the client has the mental capacity to make potentially irreversible decisions, and can demonstrate this, should this be called into question later.
Power of Attorney
A Lasting Power of Attorney is a legal document that enables your client to appoint one or more people to help them make decisions, or even make decisions on their behalf, if they’re unable to. However, only around 1 in 4 adults have an LPA in place, so ensuring that your client has one, and that this is up to date and reflects their wishes, is vital.
Establishing the options
Having carried out your KYC, you should have a detailed grasp of the client’s health and other circumstances, understand their priorities and short / longer term goals, and establish that they have a Defined Benefit pension.
You will then need to obtain a Letter of Authority (LOA) for permission to contact the pension scheme and will need to ask a lot of questions to fully understand the members options. Before doing so, however, it is vital that you check with your client that they are happy to share details of their health situation with the scheme administrators. Health information is considered ‘special category data’ under GDPR due to its sensitive nature and explicit consent must be obtained to even store this information.
In normal circumstances, just obtaining details about the value of a members benefits and immediate retirement option – let alone completing a transfer – can take months. But scheme administrators are staffed by human beings, who will often prioritise requests where the member is in particularly poor health.
If the client has not yet reached the DB schemes normal retirement age, you will need to establish whether the scheme offers standard Immediate Retirement benefits or Ill Health Immediate Retirement. Both will normally include a tax-free lump sum as well as a pension, but whilst standard Immediate Retirement may be available to all members and will be actuarially reduced, Ill Health Immediate Retirement could be far more generous, with limited or no reduction at all.
Most schemes can also offer a Severe ill health lump sum but will have stipulations within the scheme rules and require written evidence e.g. the member has less than 12 months to live, confirmed by a medical report. Although unusual, some clients may have actively chosen not to know their prognosis and whilst, with permission, you can approach their health care professional and obtain details of their likely life expectancy, extreme care must be taken in the handling of this most personal of data.
Finally, you will need to obtain a guaranteed CETV, or an estimate if the client is still a member. Even if the client intends to ‘cash out’ and access the whole of the pension as a lump sum, it is possible that the CETV could be more than the severe ill health lump sum on offer.
Abridged Advice
Since the ban on contingent charging in relation to DB transfer advice from January 2021, a client must now pay for Full Advice – whether that results in a transfer or not. However, where a client qualifies for ill health ‘carve out’, fees can still be contingent on a transfer proceeding. For this to apply, firms need to show the client has a medical condition which is likely to reduce their life expectancy below age 75. However, the client must also be lacking the ability to pay for advice at the same time, which rules this option out for many.
Where carve-out is not an option, or if you feel that this low-cost guidance could be of benefit to them, you may wish to first assess the client’s needs within the constraints of Abridged Advice. Within Abridged Advice, you can still consider the scheme options mentioned above and the general advantages and disadvantages of transferring, as well as the potential tax implications of these.
Before deciding whether Full Advice is necessary or desirable, this level of consideration could be hugely valuable for clients.
Full Advice
Even in circumstances of the most extreme ill health, where a client has a very limited life expectancy, as per COBS 19.1.1C, you must still carry out the appropriate pension transfer analysis (APTA) and produce the transfer value comparator (TVC).
In line with COBS rules, you must also ‘reasonable steps to ensure that the client understands how the key outcomes from the appropriate pension transfer analysis and the transfer value comparator contribute towards the personal recommendation.’ In addition, you should ‘obtain evidence that the client can demonstrate that they understand the risks to them of proceeding with the pension transfer or pension conversion’ and all of this must be ‘adequately evidenced… and it (the firm) should tailor its approach according to the experience, financial sophistication and/or vulnerability of each individual client.’
Vulnerable client or just vulnerable circumstances?
Whilst there are many reasons that a client could be vulnerable, not least financial problems, mental health issues etc, in the case of terminal illness it is probably better to, within reason, assume that they are vulnerable and adjust your advice accordingly.
Ultimately, stress can impair memory recall – a serious hindrance to decision-making where you are asking the client to consider multiple options. Additional steps could include documenting client conversations in writing via a post-meeting follow-up e-mail, inviting the client to bring along a trusted third-party or, if advice is being provided remotely, offering a face-to-face meeting at least once.