Projection of benefits or reduction in yield
It is a key requirement, amongst others, of the FCA’s guidance in respect to replacement business for advisers to conduct a cost comparison of the ceding and new plan and to present this to the client in a manner that is easy to understand. In relation to pension switching cases this has traditionally been achieved by including a projection of benefits comparison within the suitability report. However there is an all to frequently overlooked alternative – a reduction in yield comparison, and I am increasingly convinced of its merits.
Projection of Benefits
- It’s a familiar way of doing things.
- You can obtain the information free of charge for both the ceding and new plan from the relevant providers.
- There are various software solutions such as SelectaPension or O&M Profiler that will calculate the projected benefits for you.
- It’s a rather esoteric and confusing way of comparing charges.
- The information obtained from providers is frequently wrong.
- It can take weeks for the provider to issue the required information.
- Different providers use different growth rates, bases and assumptions which can make a meaningful comparison very difficult (Albeit this process is made significantly easier if you use one of the aforementioned software solutions).
- Should projected funds be shown as nominal values or in today’s terms?
- Potentially builds false expectations as to what the client may receive in retirement.
Reduction in Yield
- It is specifically highlighted as good practice in the FCA’s guidance notes (see page 10).
- Provides a less misleading, and more accurate and meaningful comparison of charges.
- Clearly demonstrates the impact that the charges will have over the intended investment period.
- I believe it’s an easier concept for a layman to understand.
- There’s less data for the client to process.
- The same software solutions that calculate the projected benefits will also calculate the reduction in yield.
- The reduction in yield of the new plan will be detailed in the provider’s illustration.
- It is relatively straight forward to calculate the reduction in yield of existing unit-linked plans yourself.
- It does require a little maths to calculate the RIY of the ceding plan.
- You may need to create a little calculator in Excel to calculate the reduction in yield of the ceding plan.
- It can be difficult to obtain the required information to calculate the reduction in yield of a ceding plan invested in a traditional with profit fund.
Genovo has always included a reduction in yield comparison for replacement business. However, I’d love to know what you think. Does the above reflect your experiences? How do you compare the charges of pensions? Do you include a projection of benefits or reduction in yield comparison in your suitability reports, or do you signpost the client to a separate report? Please leave a comment below and let me know your thoughts, and I promise I’ll get back to you.
Make sure you don’t miss our blogs – subscribe and get email alerts when we update our blog.
Share this post
Free Suitability Report Template
Learn how to make your reports more reader-friendly and engaging.
- All articles
- FCA Guidance
- Financial Planning Tips
- Genovo New Features & Updates
- Guest Blog
- Industry Comment
- MiFID II
- Our News
- Suitability Report Best Practice
- Tax Year Updates
- User Tips
- Word Tips