While we are all being exhorted to work longer, one of the major problems to emerge in recent years is the fact that an increasing number of life offices are imposing penalties on those who do not take retirement at their selected retirement date.
If IFAs are to avoid another round of compensation claims, they ought to remind clients of this potential pitfall. The penalties can be large, and clients will expect their adviser to have warned them of the importance of this aspect of retirement.
It will be interesting to see whether clients now coming up for retirement, who bought a pension product with a switching facility, start to blame the IFA who sold them the policy for not making recommendations in the run up to retirement to switch into bond and cash funds.
Many will not have looked at their annual policy statements. But when they do, and realise they are due to retire in the next year or so but their pension fund is some 30 per cent below what it was four years ago, there will be howls of protest. Why didn’t the IFA warn them? The Financial Ombudsman’s view is that where a client had a specific agreement with the IFA there would be regular reviews of their situation, particularly where there are fees or trail commission being paid, claims for compensation for failing to give ongoing advice may be accepted.
With less than 1 per cent of pension policyholders ever making use of the switching facility – not least of all because it was probably never properly explained to them in the first place – there could be a significant number of complaints, even if they don’t materialise into claims for compensation.
There is a lot at stake. The majority of pension policyholders are put into a managed fund or an equity fund when they take out a pension policy. Some could easily have lost 30 per cent or more of their fund over the past four years. The FTSE100 hit its all time high of 6930.2 points in the last day of trading in December 1999. Today, it languishes at about 4,700.
Had pension advisers been doing their job, five years ago they would have contacted those now approaching retirement at age 60 and advised them to switch out of the equity fund and into a bond or cash fund five years before retirement. For many it is now too late to stand any chance of recouping the losses because they cannot afford to defer retirement.
Policyholders who did switch, would not only have got out of equities pretty near the top of the market, avoiding the equity collapse of the past four years, but they would also have shown handsome returns on bonds as interest rates declined.
IFAs cannot claim that the collapse in share prices was not possible to predict. It was obvious throughout 1999 that shares were overvalued. The only thing that was not predictable was how far shares would fall, and how long it would take for them to recover. Even without the certainty of hindsight, a prudent adviser would have recommended holding at least 50 per cent in bonds.
Another potential minefield on the pensions front is looming too. Many of those coming up for retirement have to make the decision whether to take an annuity or operate income drawdown. It will be a brave pension adviser who recommends that drawdown is the most sensible option for the average retiree.
The Continuous Mortality Investigation shows that male mortality has improved by 20 per cent over the last decade. Interest rates may have still a little further to go before they peak but the annuity market is already factoring this in. Any increase in interest rates, whether immediate or in years to come, is likely to be cancelled out by increases in life expectancy which will force the life offices to cut annuity rates across the board.
It must be a pretty stressful life being an IFA, having to keep an eye open for potential problems lurking round every corner. But one of the constant grouses of clients is that once they have been sold a product they never hear another peep out of their IFA.
It’s high time this changed, and IFAs must expect to offer a continuous lifetime service to customers, albeit in return for fees.