Consideration of life cover options when advising on transfers

Consideration of life cover options when advising on transfers

The FCA has published findings and guidance around death benefits

Key Takeaways

  • Relate some of the aspects around death benefits that can lead to unsuitable advice
  • The importance of understanding the death benefits available under a DB pension scheme
  • Understand the range of different options available to clients to achieve their objectives in relation to death benefits


We often see death benefits cited as a key objective by clients when discussing potential transfers out of a Defined Benefit (DB) scheme. Given the changes around taxation of pension benefits before age 75 (DC benefits would essentially be tax free), this can seem an attractive option to clients, particularly where there are existing health issues. However, the Financial Conduct Authority (FCA), has published findings and guidance around death benefits and outlined their expectations as to how to approach this with clients.

FCA findings – British Steel

As part of the findings of its supervisory work around the British Steel Pension Scheme, the FCA made specific reference to the lack of focus around death benefits being a driver behind unsuitable advice, including the following:

  • Prioritising the provision of ‘death benefits’ for spouses and dependants in the event of the client’s death without exploring alternative options (e.g. existing DB scheme benefits or an insurance policy). Firms also failed to take into account the risk that the flexi-access funds could be depleted by the time of the client’s death.
  • Recommending a transfer because the client wanted immediate cash and income in retirement and to leave residual funds as a legacy without considering or demonstrating to the client the impact that achieving one objective may have on the client’s other objectives.
  • Failing to consider the client’s actual health, as opposed to the client’s perception of their risk of early death, which may often solely be based on the early death of family members, many of which could have been due to lifestyle or environmental factors that do not apply to the client.

FCA – guidance for firms during Covid-19

More recently, the regulator has provided an update around how firms should communicate with clients, addressing potential misconceptions that clients may have around death benefits within DB schemes , notably:

  • ‘Death benefits will be better in a DC scheme’
    Firms must adequately consider how death benefits are provided by the DB scheme and the proposed DC arrangement throughout retirement. They should also consider alternative options, such as term life insurance, and any tax implications, especially if a client has a life expectancy of under 2 years.

Understanding death benefits within the scheme

The starting point for any consideration of death benefits is to understand what death benefits will be provided within the scheme. Clearly, this will vary from scheme to scheme. Typically, as a minimum, most schemes offer a spouse’s income of 50% or more. However, some schemes offer more generous death benefits and this may include a children’s pension or perhaps provision of a guarantee period where full pension benefits are payable for a minimum period or a lump sum. Trustees may also have the discretion to provide a pension to non-married partners.

That said, there may be instances where scheme benefits do not meet the needs of the client or the different death benefit profile of a drawdown plan might still be desirable having considered what is available within the DB scheme.

Consideration of Alternatives – Life Cover

In order to approach death benefits in a comprehensive manner, any discussion should involve clarifying the client’s objective for wanting to increase death benefits and outlining whether this is driven by provision of benefits to the client’s spouse, other dependants or both. Clearly, client circumstances will dictate which potential alternatives are appropriate for consideration in relation to death benefits. However, in line with the regulators view that “a firm should start by assuming that a transfer, conversion or opt-out will not be suitable” As such, we would typically expect files to consider a range of different options which could potentially achieve the client’s objectives in relation to death benefits, including (but not limited to):

  • Existing assets – Using existing assets in combination with the death benefits provided the scheme;
  • Partial transfers and/or transferring one scheme – where a partial transfer is available or the client has more than one scheme;
  • Partial transfers – Retaining benefits of one scheme whilst offering
  • Whole of life insurance – this could potentially be funded by receiving ongoing income from the scheme;
  • Term assurance – as above but, but instead consider a short term life insurance to protect against death until other income sources become available;
  • Term assurance – to cover any genuine legacy concern during an interim period until a decision to transfer is reconsidered nearer to scheme NRD or the date when the client wishes to start drawing benefits.

In relation to life assurance products, files should reflect the level of research that has been conducted into different options. And it is important that the options have been seriously considered rather than just done as a compliance tick box exercise.

First, there needs to be lateral thinking about the sum assured that is appropriate. Bearing in mind that, for example, a whole life plan would be a means of providing a legacy while remaining in the scheme, it is arguable that it is not necessary to cover the entire CETV amount as a sum assured. In the event of death, scheme benefits would be payable and the ‘value’ of these should be considered when assessing an appropriate sum assured. In addition, the drawdown fund might well reduce significantly by the time of anticipated death of the client. The sum assured should take account of that too.

We see cases where life cover options have been researched but not evidently actually discussed with the client. What happens in these cases is that a paragraph, usually standardised, is included in the suitability report stating that the life cover option has been considered and discounted because the premium of £X (frequently not even the lowest premium from the research) is considered too expensive. Clearly, at the time the report is prepared, the client has a) not yet been made aware of the cost and b) has not had the concept of protecting a legacy by this means adequately discussed/explained. Simply discounting a whole of life plan because the adviser considers it too expensive or sees the transfer route as an easier pitch is unlikely to be viewed as having been robustly considered!

Other considerations

Clearly, each case should be addressed on its own merits, and there are several additional factors which need to be considered including client health, age of the client and their spouse, marital status and entitlement to death benefits within the scheme, other assets available, existing life cover in place, number of dependents and family history. Furthermore, where income is required in retirement, then this will clearly have an impact on the level of benefits which the client could pass on on death, and this should be reflected through cashflow modelling, as should the cost of any life cover. The legacy of the residual fund may turn out to be more illusion than reality.

Our view

There’s an old truism in financial services that nobody wants more life insurance! But what we are talking about here isn’t ‘insurance’, it’s a viable alternative to meeting a client objective without transferring and needs to be presented in that context.

The FCA has previously raised a number of concerns around how some advisory firms approach DB transfers in relation to death benefits and it is likely that this will be an ongoing area of scrutiny.

We suggest that where legacy is an objective for the client, files should clearly demonstrate consideration of all the options available and the level of research into these options including quotations for different forms of cover.

Firms should also make clients aware of the impact that income taken (on transferring from the scheme) would have on the client’s ability to pass on death benefits, as well as reflecting the impact of paying different forms of life cover within cashflow model projections.

Action required by you
  • ATEB has substantial experience of helping firms provide transfer advice compliantly;
  • Speak with your ATEB Consultant or contact ATEB directly if you would like to discuss this further.
ATEB Consulting is a trading name of ATEB Business Solutions Limited Registered in England & Wales Reg. No: 5075208. Registered office: Evolve Business Centre, Cygnet Way, Houghton-le-Spring, County Durham, DH4 5QY.
Alistair MacDougall
Alistair MacDougall
Technical Manager, ATEB Compliance

Alistair has an extensive consultancy, technical and training background and has worked at senior level with some of the largest names in the industry. ATEB first came across Alistair when he was developing RDR strategies for AXA Wealth. Over 35 years financial services experience within the IFA and Investment sectors. Wide ranging technical knowledge; detailed understanding of the FCA Handbook and its application and well versed in ESMA (European Securities and Markets Authority) policies. Expansive knowledge of MIFID II, GDPR, SM&CR and VAT. Key responsibilities include delivery of training to ATEB customers; maintaining content of the ATEB compliance manual and toolkit and producing technical IP, newsletters and regulatory horizon scanning. Worked with the FCA Specialist Supervision Department as part of the SIPP and NMPI (S55 VVOP) initiative in which ATEB acted as lead skilled person. Extensive involvement with “British Steel DB Transfer Firm” remedial work and various other DB transfer and S166 projects.

Alistair MacDougall
Share on twitter
Share on linkedin
Share on email

Key topics

Risk Disclaimer

This content is directed only to persons having professional experience in matters relating to personal investment (investment professionals) and should not be distributed to anybody else. It has been prepared for general information purposes only. It does not constitute advice (whether investment, legal, regulatory, tax or otherwise) provided by Columbia Threadneedle Management Limited. Certain content in this document is based on our own reading of legislation, regulation, or guidance issued by a government or regulatory authority, as at the date of publication, which is subject to ongoing change. Tax treatment is based upon individual circumstances. Columbia Threadneedle Management Limited gives no warranty or representation, whether express or implied, that such content is up to date, complete, or accurate.
Investment professionals in receipt of this document should not rely on any of its content. They remain solely responsible for advising their underlying clients in accordance with their own legal and/or regulatory obligations and for taking their own independent advice as they determine is necessary.
To the extent lawful, Columbia Threadneedle Management Limited excludes all responsibility and associated liability for any loss or damage suffered by any recipient of this document who chooses to rely on its content, whether occurring in contract, tort (including negligence), breach of statutory duty, or otherwise, even if foreseeable.

Team member placeholder


Legal and regulatory disclosures

For professional clients and/or qualified investors only

Nothing on this website is, or is intended to be, an offer, advice, or an invitation to buy or sell any investments, in any jurisdiction where, or to anyone whom it would be unlawful to do so. Please read our full terms and conditions before proceeding further with any investment product referred to on this website. This website may not be suitable for everyone, and if you are at all unsure whether an investment product referenced on this website will meet your individual needs, please seek professional advice before proceeding further with such product. I have read and accept the terms and conditions and cookie policy of this site.