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L&G: Osborne pensions overhaul blocked by FCA annuities stance

Legal & General, one of the UK’s biggest annuity providers, has warned Chancellor George Osborne his radical pension reforms risk being rendered ineffective unless the FCA relaxes its regulatory approach.

Osborne announced a fundamental overhaul of pension tax rules in his Budget speech last week. The changes will mean that anybody who is aged 55 or over will be able to take their entire pension pot as cash from April next year.

Osborne said: “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want.

“No caps. No drawdown limits.

“Let me be clear. No one will have to buy an annuity.”

However, L&G pensions strategy director Adrian Boulding says current FCA rules mean most customers are “shepherded” into buying an annuity rather than being exposed to investment risk through drawdown.

He says: “This is the second time George Osborne has abolished the requirement to buy an annuity, and even before this Government Gordon Brown abolished the requirement to buy an annuity when he introduced alternatively secured pensions.

“But whether or not anything actually changes will depend on how the FCA behaves.

“Before the Budget nobody had to buy an annuity but the regulatory bias in the system shepherded the vast majority of people into annuity purchase.

“We will only see a change in customer behavior if we get a change in the regulatory regime and the noises coming out of Canary Wharf.”

Following Osborne’s Budget announcement pensions minister Steve Webb suggested the Government is “relaxed” about people running down their private pension fund and living on the state pension.

Boulding says this attitude will need to be replicated by the FCA in order to change retirement income buying patterns.

He says: “Steve Webb has said if someone wants to buy a Lamborghini and live on the state pension then the Government is quite relaxed about that.

“We need the regulator to be equally relaxed. If we put somebody into an accelerated drawdown product there is a risk that in 10 years’ time they will have run out of money and are on the bread line and can claim against their adviser or provider.

“At the moment we don’t even do capped drawdown without advice. We just do not want that regulatory risk on our balance sheet.

“We will need to get the regulator to tell us very clearly what are the risk warnings we need to get across to the customer and on what basis can we write business if the customer ignores them.”

Informed Choice managing director Martin Bamford says: “The Budget reforms were rushed through and we are now starting to see the potential problems emerge.

“Just because the Government is allowing everyone to go into flexible drawdown doesn’t make it a good idea. You have to ask how the FOS will treat complaints or what your PI insurer will think if you start writing 100 flexible drawdown cases a month with small funds.

“Advisers are not going to suddenly switch from annuities being the main option to flexible drawdown, and providers in the main want advisers to take responsibility so they are not going to accept the business without an adviser standing behind it.”

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Comments

There are 8 comments at the moment, we would love to hear your opinion too.

  1. “we are now starting to see the potential problems emerge.” They started to emerge the moment George opened his mouth. Far more problems will be seen when a little more thinking takes place. This move is entirely political – benefits only those with loads o money – and will have to be either reversed or new rules and qualifications introduced.

  2. goodness gracious 24th March 2014 at 12:06 pm

    The FCA is manned by people with defined benefit pension schemes, lives in a world dominated by theory and is behind the curve on this one.
    If you find a client who wished to withdraw funds from their pension in such a way that it will probably run out within their lifetime and once spent will have a lower income, perhaps just a state one, what is the issue as long as the client understands the situation. You can advise they take an annuity due to capacity for loss, client refuses, you repeat, client refuses again, then you organise drawdown, look at appropriate investment considering the term of emptying the pot, advise on the risk that requires get client agreement, then execute his plan.
    The FCA does not realise how loathed the word ‘pension’ is within the general populace. Pensions are viewed, however incorrectly, as schemes that benefit providers, advisers, the city millionaires etc .before themselves and are viewed as a rip off. This leglislation changes all that and suddenly they are somewhere between an endowment, an ISA, a savings pot and a brucie bonus.
    The FCA will be badly advised if it did its best to discourage people taking their entitlement.
    Perhaps the best thing the government can do is dump the name ‘pension’ and call a MP scheme a TOPS scheme. (Tory Older Persons Savings)

  3. You shouldn’t believe everything you read in the press (or BBC as it was in this case). It was the interviewer who brought up the car and Steve Webb didn’t say that. What he actually said was very measured and sensible. Watch the interview.

    As for the rest, why not wait and see what the new legislation says and what the FCA have to say about it? That said, rules on suitability don’t need to change just because there’s another option available.

  4. Campbell Macpherson 24th March 2014 at 12:32 pm

    George Osborne’s budget speech was brilliant – maybe even enough to vote Conservative next time around!

    I applaud the approach of treating investors and savers as grown ups. If they can be trusted to save for decades, surely they can also be trusted to invest wisely once they stop working full time.

    I think this will be a boon for financial advice and has removed one of the biggest deterrents to saving in a pension in the first place.

    See earlier article: http://www.moneymarketing.co.uk/news-and-analysis/pensions/budget-advice-opportunities-the-product-goggles-are-off/2008301.article

  5. As a consequence of the ‘surprise announcement’ I now have someone who wants to reverse their open market option transfer, but AVIVA won’t take their funds back (they were only sent on Friday), even though other providers can and will. Given that it is within the 30-day cooling-off period, what is the client supposed to do now? The receiving company cannot keep the funds as the contract has been cancelled.

    Suggestions anyone?…Happy days and ever-shifting sands.

  6. Aha, the festering communist bunker that is the FCA has had the rug of misplaced nannyism pulled from beneath it. What will it do?

    And how does this new attempt to put the precious little conshoomer in control of his own financial destiny sit with the regulatory view that virtually every punter in the land is too much of a f-wit to understand any sort of risk warning, even if it were burnt onto his backside with a branding iron?

    Interesting times for the botty-wipers of Canary Wharf/Startford.

  7. Oh the irony that the government spends years creating AE because people don’t put enough into pension only to change the rules and say “Actually once you’ve saved it you can do what you want with it”.

    I was under the impression that the current situation was that from April 2015 people will be able to access their entire pension pot from age 55, subject to a consultation. Thats the important bit, subject to consultation. Lets wait and see what the results of that consultation actually are. I’d anticipate that it wont be as straight forward as turning 55 and asking your provider for a cheque.

    The next big question is who is actually going to be consulted! You can bet your bottom dollar that it wont be anyone with a financial services qualification thats for sure.

  8. It is a good point that FCA’s position will influence the market. However, it isn’t healthy for providers to wait on the regulator to identify and communicate risk warnings on products they might sell to customers.

    This is a huge opportunity, for both distributers and investment providers/platforms. I hope all parties, including FCA embrace the opportunity to inject some innovation into the market. Now the genie is out of the bottle, customers may prefer an unregulated product from a provider they trust to a regulated annuity.

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