I have always been a firm believer most of the financial mistakes made by individuals could have been avoided had the national curriculum included an introduction to basic products and an overview of planning. However, with each passing Budget I am beginning to question this ideal. The regularity with which successive chancellors have meddled with the fundamentals of basic products has now become tiresome.
Let us take, as a case in point, the imminent introduction of the new pension freedoms. When I started out in my pensions career over 30 years ago, one of the fundamentals embedded in my learning was that the valuable tax reliefs given to contributions and growth were granted so the proceeds could provide a pension income to the individual for life. I am sure that was the basis understood by everyone that has contributed to one in their lifetime. This was understood and was planned for. However, it is no longer the case and the proceeds of a pension, post-pension commencement lump sum can now be taken through flexi-access drawdown or uncrystallised pension lump sum at the whim of the individual
But the implications and potential dangers of such a radical change are apparently a worry to the Government and, of course, the regulator whose role is to protect the financial interests of these individuals, effectively from themselves. These individuals need to be re-educated. So with the announced introduction of the pension freedoms came the invention of the guidance service: an education provider, not compulsory but available to everyone approaching their drawing date – a first line of defence against mistake makers.
This guidance should introduce the concept of independent financial advice – another not compulsory but available-to-all service that is surely the best line of defence. Advisers provide a personalised tuition option against the mistakes that could be made.
Not satisfied, however, the burden of this second line of defence has instead been placed on the regulated product providers: those that might provide the new financial freedom products. This service, we are told, should be personalised, non-templated and provide relevant risk warnings based upon answers to be given to questions posed by the provider itself. It looks like personal education, which might be regarded as advice.
So, can it work? If an individual has chosen not to take advantage of the guidance service or not to consult an adviser, will they take any notice of warnings provided as this second line of defence?
The product provider is not the party that should be educating customers. It is not their role to interpret information given in order to determine which risk warnings should be given on a personalised basis. This is placing an element of decision-making and potential liability on the provider, where there should be none.
The guidance service, independent financial advice and general risk warnings should be enough. Responsibility for obtaining them should lie with the individual who, after all, will face the consequence of their actions.
Martin Tilley is director of technical services at Dentons Pension Management