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Govt urged to mandate advice before savers cash in pension guarantees

The Government is facing calls to introduce a new requirement for people with guarantees embedded in their pensions to take advice before cashing out.

Under the proposal, first made by Royal London chief executive Philip Loney, savers with £30,000 or more in a pension with guaranteed annuity rates would have to speak to a financial adviser before opting for a lump sum instead.

The number of Royal London customers cashing out their pensions despite having generous guaranteed annuity rates has doubled since the Budget.

As part of the changes announced in March 2014 – when Chancellor George Osborne unveiled radical pension reforms – the trivial commutation limit rose to £30,000.

Since then, the proportion of people with small pots including guaranteed annuity rates – which can be as high as 14 per cent – who cash out has leapt from 26 per cent to 54 per cent, Royal London says.

Loney says: “We have seen a doubling in the number of people with small pots and guaranteed annuities who are taking cash. That’s not necessarily the wrong thing to do – they may have debt to pay, for instance – but if we start seeing that kind of thing for people with bigger pension pots I’d be really concerned.

“We should make it compulsory for anybody with a guaranteed annuity in a pot above £30,000 to take regulated financial advice before they draw out that annuity. Just like we’re doing with someone with a DB pot.”

He says Royal London policies with guaranteed annuity rates are commonly between 8 and 10 per cent, with the most generous at around 14 per cent.

Sovereign Independent Financial Advisers director Mark Hibbitt says the idea is “well intentioned and very sensible” but adds: “It is hard to say what the right threshold for advice should be because it would vary on a case-by-case basis.”

But Holland Hahn & Wills partner Simon Ainley thinks the advice requirement should be extended further, to any pension with a guarantee.

He says: “If there’s a guaranteed rate involved everyone should take advice, irrespective of the size of the pot. You could argue small pots could be of more importance to the individual. If someone is losing a guaranteed benefit, they should understand in straightforward terms what they are giving up and an adviser can help them do that.”

Under new rules, from April this year people will have to see an adviser before moving a DB pot bigger than £30,000 out of a scheme.

There is expected to be a surge in demand for transfers out of DB schemes to take advantage of the new flexibilities available in the DC market.

Old Mutual Wealth reports a threefold increase in enquiries about transferring out of DB schemes.

Retirement planning manager Adrian Walker says: “It has been suggested that DB to DC transfers may increase as savers look to take advantage of the new pension freedoms. We have seen transfer enquiries to our pensions technical team increase by approximately three times since the reforms were introduced.

“While it is too early to say if there will be a long term increase in the proportion of people transferring out DB arrangements, this does indicate that advisers with the right level of expertise are receiving more enquiries from consumers that want a comprehensive review of their retirement income options.”  

A recent survey conducted by Hargreaves Lansdown pointed to around half a million DB scheme members planning to transfer out.


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There are 14 comments at the moment, we would love to hear your opinion too.

  1. The DB comparison is well founded, and from a client perspective, highly relevant. However, there is often work in identifying such policy features (especially where the plans have been inherited as part of an acquisition), and this may prove expensive if providers are forced to do this, especially if every policy must be checked regardless of value.

    Many clients will feel that they are being left between a rock and a hard place; pay £*** to go to an adviser for advice on a small pension or stay where you are and be forced to take income as dictated under policy terms.

    Although wrong from a purely actuarial perspective, I feel that the most comfortable approach would be to set the bar at £30,000, as this on a par with DB pensions.

  2. I think the intention is correct but don’t believe that mandating advice is always the right thing.

    As long as the scheme makes the client aware that there is a guaranteed annuity rate, what the rate is (in £ and %) and also how that differs to a ‘standard rate’ then the client can make an informed choice that is probably understandable. They can then continue to fully en-cash, buy a different product (which has the same impact of losing the guaranteed rate) or takes advice.

    If you apply this to everyone, not just those with over £30k, then everybody wins with more helpful info.

    I do recognize the logistics will be a nightmare for the scheme, as it is not just about the rate but also when it does (and does not) apply, particularly if they are taking benefits at a different time to their normal retirement date on the plan!

  3. I think as a compromise the most balanced approach fro plans with guaranteed rates would be to set the bar at £30,000, as this is on a par with DB pensions.
    any post stakeholder plans will not have guaranteed rates and SHOULD be stakeholder friendly. If they turn out not to be, then it should be on the original advisers head and the providers all know who the advisers were who arranged non stakeholder friendly or non singled (ongoing) charged plans were. There should be nothing complicated about post 2001 plans if RU64 was followed by the advising firm, even post 88 plans are unlikely to have guaranteed rates, although they may have capital and other units and very low AMCs meaning a little more thought is needed, but the newer the plan the less it has become like rocket science.

  4. Getting advice about any potential guarantees is vital. A client was referred to me wanting to draw benefits two years before the maturity date, and had seen a Prudential adviser who then quoted standard annuity terms. I then discovered that Guaranteed Annuity Rates existed which would provide 50% more income in two years’ time, something the adviser completely forgot to mention.

    Having advised him to wait, he has come back to me a few months later determined to draw some tax free cash to clear his debts. I asked for an immediate retirement quote, initially without specifying any adviser fee, and found out that if he receives no advice he gets the guaranteed rate now, but if I advise him he gets £1200 per annum less. If he lives 25 years he gains 30k by applying direct.

    Now if I took six months to get the facts from the insurer, what chance does the ordinary consumer have? You have to assume that anyone retiring now who has had an old policy could have some form of guarantee built in, and an Independent Adviser should be able to identify if that is the case.

    As proved by this case, trusting the current scheme provider to set out all the options did not work. And yes, I saw the quote and the chaser letter from the adviser, fortunately I stopped the transaction just in time.

    In this case the pot is 121k, well worth his while paying for my help, clearly there is a level at which it is not cost effective and 30k is as good as any.

    This has the potential to be as big a scandal as anything that has gone before, and it is the responsibility of Government to help protect the consumer against the inevitable consequences of this new legislation if left unchecked.

  5. Essentially what we are saying is that policy documents sent out by providers are not clear, not fair and potentially misleading. (COBS 4.2).

    Whilst I recognise not all clients will understand the implications of what they are about to do, if a push was made by the FCA to enforce that providers communicate with clients better, the increase in clients making potentially wrong decisions could be reduced.

  6. Plan Works as most of these policies were written in the 80’s I’m not sure if COB rules apply?

  7. Geoff’s experience mirrors my own. Having dealt with the majority of providers administering plans with GARs, those that proactively highlight the benefit are few and far between.
    Regardless of the advice position, providers must get their own administration in order to ensure that such terms are picked up and highlighted to the customer. The restrictive terms (often GARs are on a single life, non-increasing basis) must also be made clear, to ensure any informed decision is based on the full facts.

  8. As Geoff states above the starting point for advice is always, what is in your exisiting arrangements?

    Doesn’t seem to be signposted anywhere in here though it would appear you may want to talk with an adviser if you are considering drawdown…….

  9. As always the perception that taking an annuity does not require financial advice…

  10. @Geoff what was the start date of these plans? I’ve not come across any post stakeholder arranged plans with GARs, so it should be a simple matter to produce a flowchart (I know the stakeholder ones were useless) to identify when it is likely a GAR is involved and when not so that a consumer can make an informed decision as to whether for smaller cases advice IS essential and likely to be cost effective afterall, or as the FCA like to mention now a self defeating exercise with regard cost.

  11. Such a call seems to be very close to suggesting that the FCA should mandate OM as the default option. Why won’t it?

    Whilst the cost of IF Advice may well be disproportionate relative to small funds, at least guidance could be stipulated as a minimum requirement, with the cost of such sessions met by redeemable vouchers. As a condition of acceding to any requests to cash in a policy, insurers could then insist on the production of some sort of certificate confirming such guidance has been taken. No certificate Mr Policyholder? Sorry, no can oblige. The certificate might even record the considered opinion of the guidance provider and, should this be that cashing in isn’t the right thing to do, the insurer could then take a view as to whether to facilitate it.

    The problem this would throw up, though, is that it would fly in the face of the government’s stated position that people should be free to do whatever they want with their pension fund/s ~ what? Even if such a course of action is patently the wrong thing to do?

    Pandora’s box syndrome again.

  12. Someone with a £30,000 pot is unlikely to pay £1000+ for proper advice. Having review all of what the FCA are looking for from adviser both pre and post April ref at retirement suitability for advice, anyone and I mean anyone who does this for less than £1000 is mentally unstable. The work required to demonstrate suitability and ALL the options along with failures of what it means on a specific basis will take hours.

    Send to them all to CAB for bog standard guidance and then they can do what they like with their pots thereafter. FFS do not send them my direction. I will stick to dealing with clients who have used me for years thanks very much

  13. Philip – It was a Retirement Annuity Contract invested in With Profits so for me that was a red flag to check for guarantees, something the Prudential adviser should have known about.

    Speaking to the client today, ( and not giving him advice! ), he tells me that Prudential approached him as he was eligible to draw benefits and they sent an adviser to see him. At no time did they say he would get a better deal just dealing with their customer service staff and cutting out the adviser, and at no time did they mention this to me either, I found out by accident.

    So in conclusion it would be best to look at any pre Stakeholder plans in With Profits and ask the questions as to whether guarantees apply, when, what options, and whether adviser involvement would prejudice any guarantees. I consider this to be standard procedure on any such old style plans as there is a lot of client money to be lost, and I will get the blame.

  14. @Geoff – I agree now that you have clarified it was pre stakeholder. I would even argue that as the plans were originally established with the cost of advice incorporated in RACs, that the provider should be iobliged to provide advice at THEIR cost on pre stakeholder plans. This is where the mandating is needed and I forsee regulated advisers like you and I coming across failures on the part of the providers to do thi after the event and cases going to FOS and being upheld against the provider (as not advice will have been involved despite the fact the plan was established with inclusive advice by a direct salesforce which no longer exists)

    Post stakeholder plans do not have any automatic deduction for advice and will pretty much be clean plans and whilst advice might be to use the exiting provider where appropriate, the consumer has little risk of getting this wrong for small pots provided they listen to what PensionWise staff tell them.

    @Julian – Your solution with the vouchers and your explanation as to how it might work makes sense to me, so there is NO hope of it being adopted 🙂

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