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Inherited failures

How a review of a new client’s pension drawdown case exposed fundamental mistakes in advice

Best Advice, David Brunning

We were contacted by Mr and Mrs Smith who were seeking an independent review of their pension income-drawdown arrangement. The results show that important mistakes were made in the research prior to the advice, as well as the advisory process.

In early 2005, Mr and Mrs Smith sought advice from an IFA on what to do with their Standard Life personal pension and their retained pension benefits held in an occupational pension scheme. The personal pension was valued at around 59,300 and included 27,600 held in with-profits.

The fund value given in a statement issued by the occupational scheme was 64,300, making a total fund value between the two schemes of around 123,600.

The clients informed the IFA that they did not need any immediate income as they had the surplus proceeds from two matured endowments which could be used to support them for around 12 months.

Mr Smith had left service due to mental ill health. They asked the IFA what options were available.

The IFA’s advice to the clients was to transfer both the personal and occupational pensions to a personal pension from a different provider, which offered pension income drawdown and phased retirement options, with the recommendation that they be triggered some 15 months later, after A-Day.

It subsequently became apparent that the trustees would not release the occupational pension funds to this type of arrangement, so the only transfer to take place was 59,300 from the personal pension. No later revisions were made to the original advice by the IFA and no hard disclosure took place. We estimate that, based on a previous illustration, the commission payout exceeded 3,400.

We take no pleasure in criticising a fellow professional but there were a number of obvious areas which we identified and advised the clients to take up with the original adviser.

In April 2004, Standard Life announced that it was going to demutualise. The company said it intended floating on the stockmarket in 2006, with 2.6 million policyholders in line for windfalls averaging 1,500. Given that Mr and Mrs Smith’s personal pension plan had significant holdings in Standard Life’s with-profits fund and there was no urgency in taking pension benefits, we saw no reason why their pension benefits were transferred out of Standard Life in 2005.

Building on the above point, we saw no justification for arranging the transfer in 2005 at all. Mr Smith did not want to take any pension benefits immediately. Indeed, the adviser urged them not to take any pension benefits before April 6, 2006 because pension simplification presented them with the opportunity to take 25 per cent of the protected rights’ fund as tax-free cash.

With regard to the occupational pension scheme, here the IFA made several critical errors. In the suitability letter, he mentioned that the scheme was to be wound up and so he saw no need to include any further comparisons with the scheme and he failed to make any mention of the trustees’ post-winding-up proposals.

In so doing, the IFA failed to note or incorporate the fact that the scheme was only closing to further accrual and was not being wound up, that the client had valuable guaranteed minimum pension benefits in the scheme and that the client may have been eligible to take more than 25 per cent of the pension fund as tax-free cash under occupational rules. The scheme trustees were not contacted and the availability or amount of a transfer was not confirmed prior to advice being given.

Those readers familiar with pre-pension simplification advice on annuity deferral arrangements need no further comment or explanation as to why we have advised the client to return to the IFA asking for a full review of the 59,300 pension income drawdown-led transfer and a response to these important issues.

What we found particularly disturbing was that despite advice and compliance in connection with retained occupational pensions and pension annuity deferral arrangements being particularly sensitive, as recently as 2005 fundamental mistakes were being made in research and advice, not least of which was an absence of any comments on alternatives other than pension annuity deferral.

Having identified a number of material errors in Mr and Mrs Smith’s pre-existing arrangement, we started looking at other drawdown cases we have inherited. We naturally reviewed the arrangements themselves and their current and future suitability when we were appointed but we did not routinely examine the basis of the original advice to see if it met the client’s original instructions. We believe it is now essential to consider how an annuity deferral arrangement started, to ensure that clients were correctly advised from the outset.

David Brunning is a director at Brunning Newman Houghton

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