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Means streets

James Salmon on how conflicting means-testing messages from the regulator and the DWP have left advisers in limbo.

Last week, the Department for Work and Pensions warned advisers that they would be “extremely irresponsible” to recommend that their clients do not save into personal accounts because of the potential erosion of their savings by means-testing.

DWP chief economist Robert Laslett told a Social Market Foundation meeting last week that means-tested benefits are a safety net that could be altered by the Government in power at any time and should not be relied upon.

Laslett said: “A financial adviser who told someone they should rely on means-tested benefits would not be doing their job.”

But guidance contained in the FSA’s latest newsletter for advisers stated clearly that assessing the impact on entitlement to means-tested benefits is a key part of providing suitable advice for certain clients.

The DWP’s statement has angered Scottish Life head of pensions strategy Steve Bee, who argues that IFAs who do not consider the impact of means-testing benefits will be accused of misselling.

He fears a massive misselling scandal, with thousands of people being pushed into personal accounts and having 40 per cent of their savings clawed back by means-testing.

He dismisses the Government’s confident assertion that the vast majority of people will enjoy generous returns and even moderate to low earners can expect to get £2.50 in retirement for every £1 they put in. He points out, for example, that the idea that savers will squirrel away 8 per cent of their earnings in the first place is a myth perpetuated by the Government as the first £5,000 of earnings is unpensionable.

But it is the FSA’s latest guidance to advisers on means-testing which has prompted Bee to resume his well-documented Battle of the Blogs with pensions minister James Purnell.

Bee says the Government should abide by similar rules as IFAs when auto-enrolling people into personal accounts and has demanded a list of assurances.

He wants the Government to somehow ensure that auto-enrolled savers will be advised of the impact on their entitlement to means-tested benefits. He also asks whether there will be an age limit for auto-enrolment for people with no savings. He adds that the DWP should use its national insurance database to help individuals understand their means-testing position.

Bee says: “The Government should be held fully accountable if it does not ensure the impact on means-testing benefits is assessed before people are auto-enrolled. It would be crazy if there are two different pensions markets – one where consumer protection is paramount and one where there is no protection at all.”

Richard Jacobs Pension and Trustee Services director Richard Jacobs sells lots of stakeholder products to exactly the people that will be targeted by personal accounts. He admits he is very concerned about the onset of the national scheme, particularly in the absence of independent advice.

Jacobs says: “This is legalised robbery and a Government whitewash. The Government will be immune and the people who will be hit hardest are the poorer people who cannot afford regulated advice.”

For its part, the DWP says it will work with the independent delivery authority responsible for overseeing the implementation of personal accounts to provide generic information to people on whether to opt out.

It will also link up with the Government’s wider strategy on improving financial capability, including the taskforce led by Otto Thoresen, which is researching and designing a national generic financial advice service.

A spokesman says the DWP believes there will be good incentives to save for most people. But he adds: “We are aware that people approaching state pension age when personal accounts are introduced would have a relatively short time to build up their personal account fund. We are currently seeking views as to whether it is appropriate for this group to be automatically enrolled. “

It is good news that the DWP is being receptive on some fronts, but the promise of generic advice will give little confidence to most people.

IFG Financial Planning strategist Donna Bradshaw says the root of the problem is the absurdly complex means-testing system which creates no incentive for people to save. She says people who save into personal accounts and the advisers that tell them to do so are essentially gambling on the Government’s assurances that means-testing will not be an issue for the vast majority of people.

She says: “Advisers should be actively discouraging people to go into personal accounts but the Government is telling them not to do this. In 20 years’ time, if the Government predictions are proved incorrect, many advisers will be held to account.”

She believes the only way forward is creating a univ-eral flat-rate pension. Until then, people will be in grave danger of having a massive chunk of their savings wiped out and advisers will be in limbo.

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