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FSA may investigate accelerated drawdown firms

The FSA has warned it may investigate firms offering accelerated drawdown products if it finds they are being marketed, sold or used inappropriately.

Money Marketing revealed in October that Sipp and Ssas provider Talbot & Muir was allowing clients to withdraw 25 per cent of their pension fund each year in addition to the maximum allowed by the Government Actuary’s Department, even though exceeding this limit results in a 55 per cent tax charge.

The move prompted a barrage of criticism, most notably from Hornbuckle Mitchell, which claimed the firm was breaching HM Revenue & Customs rules.

A heated debate ensued between Hornbuckle and Talbot & Muir on the topic on this website.

Speaking to Money Marketing, FSA conduct policy division manager for pensions Milton Cartright urged firms to take “great care” when selling accelerated drawdown products, adding that the FSA may launch an investigation into the area.

He said: “Income withdrawal is a complex area that carries significant risks for consumers and is only suitable for certain people.

“Accelerated drawdown is in our view inherently more risky because it results in a product designed to run down a pension fund.

“For most people their pension fund is a very important asset and it needs to provide an income for rest of their life.

“It is very unlikely that this product would ever be suitable for very many people indeed it is difficult to see who it would be suitable for except in some very extreme and unlikely scenarios.

“Great care needs to be taken firms selling this product. We will look at this if it appears that these products are being marketed, sold or used inappropriately.”

He added: “A firm offering this type of product would need to consider their treating customers fairly responsibilities very carefully and that includes defining the target market for the product and monitoring that the product is not being used inappropriately.”

Hornbuckle Mitchell director Mary Stewart says: “I am not at all surprised that the FSA has expressed this view. Talbot & Muir’s relaxed attitude to unauthorised payments is clearly against the spirit of the legislation and invites pension-busting.

“The FSA was obviously going to have something to say about it. The risk is that this sort of approach brings the whole industry into disrepute such that everyone loses.”

Talbot & Muir director Nathan Bridgeman says: “What we are doing is within HMRC rules and HMRC has actually confirmed to us in writing that as long as we collect the tax correctly what we are doing is fine.

“This is not something we are marketing, it is simply a facility that will suit certain types of clients and it is always on a case by case basis and only after independent financial advice has been sought that we would look at these cases.

“If it helps someone to save tax ie. they are going to pay 55 per cent tax rather than 82 per cent tax on death post-age 75 then surely that has to be treating the customer fairly. You could argue that it is not TCF if you do not point out that it is available.”


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There are 20 comments at the moment, we would love to hear your opinion too.

  1. Incompetent Regulators Awards Team 4th December 2009 at 1:17 pm

    FSA scratching around for jobs are they????

  2. Christian Patricot 4th December 2009 at 1:46 pm

    Are T&M suggesting or advising their clients to re-invest part or all of the excess income into alternative products and earning fees or commission for doing so?

  3. I wonder who Hornbuckle Mitchell is going to pick on next? Who else takes a lot of business from them?

  4. More nanny state can’t have people controlling and deciding what to do with their own money can we.

  5. Clients are currently having to take annuities at present to access TFC whilst continuing to work where a drawdown facility keeping the income element invested to take when they stop work would be more appropriate in common in my network. When questioned I am told that this is due to FSA minimium drawdown rules. Under TFC leaving pension funds invested with nil income thereby providing a better annuity when clients retire seems sense to me,

  6. I have a client who wants to do exactly this because he’s so anti-annuity and he really doesn’t care about running his pension pot down.

    Of course, if the annuity trap no longer existed and any unspent funds could pass tax free into PP’s for his children, then he wouldn’t be too bothered.

  7. This is outside my area of expertise, but it always looked a bit dodgy when I saw the way that some firms were marketing it.

    I am surprised that this hasn’t been looked at before now. Apparently, the FSA are now reviewing the option of building a wall from Carlisle to erm, Wallsend to protect Roman settlements from the Picts.

  8. Why do we have the annuity trap that these ‘consumers’ are so desperate to escape from?

  9. David Trenner - Intelligent Pensions 4th December 2009 at 2:53 pm

    “I have a client who wants to do exactly this because he’s so anti-annuity and he really doesn’t care about running his pension pot down.”

    And no doubt you have told him all about Henry Allingham who bought an annuity at 65 and took income from it for 48 years. Sometimes the hardest job we have as IFAs is to persuade clients what is right for them.

    For clients with decent sized funds and other resources drawdown is very attractive until at least age 70, but for most of them the exit strategy needs to include annuities.

    Using the Talbot & Muir approach to pension busting is not a good idea.

    Does anyone remember the Roux brothers SSAS?

  10. To Anonymous | 4 Dec 2009 2:06 pm, there is NO FSA rule which says you must not reccomend, not allow a client to make use of USP at a particular level. FSA “guidance” is that in their view, USP under 100k is innapropriate for the majority of individuals.
    As with all situations, there are exceptions and ensuring you justify a variation from “guidance” to the client and yourself and are prepared to stand and justify your advice to the FSA (or your network) is what is essential.
    I rarely arrange a lifetime annuity for anyone under age 60, whatever the circumstances, the issue then becomes whether the cost of advice of USP (inclduing fixed term annuities) outweighs the benefit to the client with smaller pots….
    Your Network can legitametely tell you they will not support (and nor may their PI cover) USP under any figure it likes, but it is NOT an FSA rule.

  11. To ‘Anonymous | 4 Dec 2009 2:06 pm’. As it sounds like you don’t understand the FSA rules around USP then I for one are quite pleased for your clients that you are constrained by a network!

    Personally I agree with FSA’s guidance on this. If you listen to any of the industry pension gurus they are also in broad agreement with this stance.

    Anyway, try approaching a provider with a pot of £15 and ask for USP, you’ll be able to hear the entire technical department laughing down the phone at your ineptitude 🙂

  12. Dathan, the fixed term annutities offered by Living Time ARE USP plans and for a client who requires their PCLS before age 60 (for whatever justifiable reason) these may be more approrpiate than an annuity before age 60. Would you agree?
    The FSA’s guidance of £100k and below may NOT be appropriate for USP is a sensible starting point, it does not in my opinion mean that there will be NO situations were under £100k is appropriate.

    I unfortunately however came across a gentleman who had been sold an Equitable Life with profits USP with a value at the time under £5k, what a MESS…………

  13. I dont what the issue everyone has with pensions. They do exactly what they say on the tin. When people set them up, if the adviser at the time has done his job, they will have been made aware that there is a price for the tax advantages that pensions benefit from that a taxable income has to be taken at some point in the future.

  14. Lots of opinions and conjecture and yes we are still trying to figure what the FSA is up to and I guess so are they.

    There are many cases below £100k when USP works and many above it when alternative options work.

    Documentation on your file is the key – considering all of the various options for the client and putting it in writing.

    I suggest that if anyone is in any doubt read the Cheshire L&P FSA determination and have a think about the fine against Chase De Vere. In both cases the FSA stated they could not in the main see poor advice just that the documentation did not suitability indicate the key issues for the clients including how the advice was arrived at. And yes even when an annuity was bought!

  15. to Anon at 10.11, that’s what we did and we came to the conclusion that the only way to demonstarte the process, questions asked and answered, reccomendations made and actions taken was to record the WHOLE process. a suitability letter, just is NOT enough. All our meetings are saved as MP3 files….. at least that way we can ONLY be hung out to dry for what DID happen and not what might have happened….

  16. Horses for courses, as ever.

    If you had a seven figure USP fund and were a 40% taxpayer even without pension income over 70 heading for 50% tax in 2010/211 ( and I had such a client) then if it is correct that the excess payment would not trigger dis-approval/de-registration of the scheme or rnder the individual liable to pay extra income tax on top of the 55%; then this seems a logical route to consider.

    It would very probably be limited to those who had no reliance on this pension fund for their own or Partner’s financial security, but there are such people.

    Similary min USP funds depend on circumstances. For someone with little financial awareness and not much in other resources I would suggest £100K is not enough to cover the risks involved.

    Take a University Professor with a £100K in Peps/ISAs; a £35K Index linked pension and £50K in an AVC or outside activities PPP fund who understands the volatility and wants to use it for flexible top ups, then why not ? ( I had a number of these folk too.)

  17. Richard Brown, Managing Director, Moneynotion Limi 8th December 2009 at 2:48 pm

    If Inland Revenue Rules changed to include the formula used in the USA for their 401K plans, but leave the right to have an annuity for those who wanted it and we removed the insistence on have an annuity at age 75 then I think we would all be better off.

  18. It strikes me that this is very self serving on the part of Hornbuckle Mitchell. Could it be that their claim that “No other SIPP allows more” is very wrong and that Talbot & Muir have a SIPP that now allows more? Are Hornbuckle trying to get this product banned? If so I think this is shameful opportunism by Hornbuckle and disadvantages both IFA and SIPP member.

  19. Some very good points raised here. At Talbot & Muir we are singing from the same hymn sheet as the FSA. We fully endorse Mr Cartwright’s comments which are why we have never advocated or allowed our Accelerated Pension Withdrawal (APW) facility to be used, sold or marketed inappropriately.

    It is unfortunate that certain pension providers choose to get personal and attack a company that is facilitating the use of legitimate tax planning tools for IFAs. As professional trustees and scheme administrators, we feel that several points have been overlooked here:

    1. This facility is in the HMRC Registered Pension Scheme Manual which is our pension rule book
    2. We have in writing from HMRC that providing we collect the tax correctly they have no objection in principal with what we are offering.
    3. APW business is only being introduced to us after advice has been given by an IFA. This gives the adviser the opportunity to explain all decumulation options to their clients and the various tax implications / death benefits
    4. Our protocol is such that clients are having to read and sign a declaration to demonstrate they understand fully what APW is and what it does i.e. in keeping with TCF, there is an extra level of compliance we have imposed over and above what is necessary
    5. APW may improve the tax position of those clients families who might otherwise face a penal 82% tax charge on death post age 75 within ASP. IFAs are using the facility to ensure clients pay 55% tax now rather than their families paying 82% in the future.

    This has always been a facility that the IFA can use for their clients. We are not saying IFAs should use this, rather we are saying IFAs should have all options and tools available, be it scheme pension, USP, ASP, APW or a combination to meet different client requirements.

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