23/02/2020
Latest article from Pocket Money.
The fall out of Final Salary ( Defined benefit ) pension scheme advice surrounding transfers
The 6 April 2015 Budget delivered by Chancellor George Osborne saw the most radical changes to private pensions for a generation. The political spin was that 'Pension Freedom' gave clients more choice where their pension planning was concerned.
At the time these reforms were introduced by The Treasury I believed, as I do now, that George Osborne would be seen as the man who introduced older savers to choice but sadly significantly also exposed them to huge risk.
Although this piece of legislation had officially been introduced to enable clients to have more choice on how they take their pension income at retirement, I could only see one benefactor; The Treasury.
The Chancellor, and all of his successors still only allow 25% of a pension fund value to be taken as a tax free cash lump sum. Pre Pension Freedom, the remainder of any defined contribution or defined benefit scheme, had to be taken as annuity.
The problem with annuities is that the annuity rate has been decreasing since I became a financial adviser in 1987. This meant that for Personal Pensions/Group Personal Pensions ( defined contribution plans ), Free Standing Additional Voluntary Contribution schemes( FSAVCs ) and in-house AVCs for every pound held in these schemes the conversion rate for annuities has been providing ever decreasing annual pension incomes ( annuities ).
I had always thought that George Osborne had missed a trick by not threatening the annuity providers with introducing Pension Freedom if they did not 'get their act in order' and collectively agree to offer reasonable conversion rates for clients when they came to retire. Such a threat may have meant that clients were offered higher annuity rates and therefore better value for money than they had experienced over the last couple of decades.
This would have been a more prudent strategy for The Chancellor to take. Negotiation has to be the best way forward. If it doesn't work, then introduce Pension Freedom as intimated at. Sadly, this scenario never took place.
Sceptics in the room, including myself, will argue that there was a fiscal motivation for not following at this logical step: increasing immediate revenue to the HMRC by taxing clients choosing to take more than 25% of their accumulated pension pots as cash rather than taking the traditional income tax drip when annuity income is paid to a client each month as a taxable income.
By facilitating Pension Freedom, clients could now choose to totally cash out their pension funds. After all, they had saved all of their working lives and surely then it was their choice on what they did with their money.
And here lies the dilemma. Everyone seems to have forgotten that you invest in a pension so that you have fiscal provisions for when you retire. Annuities provide a monthly/quarterly or annual income that is payable for the rest of the annuity owner's life, regardless of whether they live to be 120!
Annuities are complicated contracts as actuaries number crunch in order to ascertain how long the annuity provider may have to pay for. No-one knows when they are going to die or how they are going to die. But statistics based on gender, age, smoking status, medical history, height and weight provide a pretty good guide in this legitimate game of 'annuity spread betting'.
The UK, like the majority of developed countries, has become a 'Dependent Society'. Our demographics show that we have less babies being born and that our elderly are living longer due to better diets and NHS medical advancements.
The average life expectancy in 1900 was 47 for men and 50 for women.By 2015, men could expect to live on average until age 79, and women to age 83.This means that a client's retirement income has increasingly had to be paid for a longer period of time by annuity companies ( another reason why annuity conversion rates have been shrinking over the passage of time ).
The majority of elderly clients that I meet are asset rich cash poor. They are now releasing cash from the bricks and mortar of their homes and investment properties, to fund their lifestyles. Good pension planning whilst they were working would have solved the majority of their present cash-flow issues.
Pension Freedom has exasperated this situation. For nearly the past five years more and more clients are destroying the good work that they did in creating their pension pots by literally cashing them in.
Apart from tiny pension pots which hardly dent into the solving the cost of living, why would anyone want to pay income tax on up to 75% of the pension fund values by taking them as cash?What are these clients going to live off for the remainder of their days?
Pension Freedom has not just ravaged through the world of personal pensions, it has hit the precious dying breed of Final Salary Schemes. Guaranteed Defined Benefit pensions are being exchanged for cash too. These pension pots should be left alone in most cases, the exception being when the scheme is being wound up and you have no choice but to move it somewhere else ( into another pension plan ).
I made the judgement not to get involved in Defined Benefit Transfer advice a long time ago. Sadly for our industry, this view has not been taken by all advisers. The fall out of this professional decision has been horrendous. Clients have become victims of poor advice and in many cases become the victims of criminal activity. The unscrupulous have enticed naive, greedy and ill informed clients to invest their pension money in dubious schemes ( many of which are offshore and therefore provide no client protection whatsoever ).
The FSCS have been extremely busy redressing this poor advice. Sadly the relatively few rotten tomatoes in the cart have detrimentally affected the remaining healthy ones: the IFA s who have not advised clients to make these transfers. All advisers ( regardless of whether they offered such advice to clients or not ) are now having to pay larger industry levies to fund client redress claims whilst many of the guilty close down their operations and in some cases phoenix their operations: opening new practices in order to escape fiscal redress.
The penalties do not stop there either.Professional Indemnity cover is harder to get, and without it, like any business, you cannot trade.
The whole pension system is now broken. Many clients have suffered by taking poor advice, Cash in this situation is not King.
Some advisers have been greedy, signing off pension transfer cases and dealing with encashments.
The FCA has not thought through their attempts to stem the tide of the fallout either.Because of this, we are seeing the slow death of access to good, highly dependable financial advice. The FCA is supposed to be protecting the client and ensuring that all clients are not just treated fairly, but have access to good advice, especially when they are low earners who can't always afford to pay for advice.
The new ambulance chaser for me as an IFA is the regular emails and calls I receive to sell my practice to a larger one for cash.
I do blame George Osborne for creating this mess. It was an irresponsible piece of legislation brought in to swell the Chancellor's coffers. It has created a bed of greed, mistrust and ultimately damaged the one thing that it should never have done...the client.
Today clients find it extremely hard to get good financial advise from a legitimate IFA where Final Salary pension transfers are concerned. In fact, with the advice service being slowly decimated, to get any decent financial advice on anything.
I do feel that The FCA has failed clients and good advisers alike. I have already complained at the last FCA AGM in London that they have made a huge mistake taking the majority of IFAs off their website register under the Senior Managers and Certification Regime. The buck may stop with the Senior Manager, but how are clients now to know for certain who is a legitimate IFA with the correct qualifications for the advice they now require?
The client has to be protected at all cost. Unfortunately, in this situation, the regulator is failing them by not protecting them from the criminal vultures circling above their heads.
Things have to change. Good IFAs need protecting, because without them, there is no-one to give advice. Robo advice is struggling and will continue to do so as clients need bespoke advice to recognise their specific needs. No algorithm can do that.
The FCA need to start looking after good advisers and not beating them all with the same stick as the bad ones. If there are no advisers, there is no need for a regulator.
The Government also needs to take responsibility for this situation. It is no good batting back complaints from advisers to the regulator. A Conservative Chancellor made the mess and now the present Conservative Government needs to clean it up.
Best
Rowena
