Means-testing poses a serious misselling risk to IFAs now and is not just a distant NPSS-related threat, according to Lyncombe Consultancy managing director Malcolm Small.
Many industry commentators fear a significant number of people on low incomes auto-enrolled into pension personal accounts will find 40 per cent of their savings clawed back through means-tested benefits.
Scottish Life head of pensions strategy Steve Bee says this could prompt a major misselling scandal with IFAs potentially liable for advising clients to save in personal accounts.
But Small argues that consumer detriment is happening now and will just continue under the proposed personal accounts scheme.
He says a substantial number of poorer pensioners are effectively subsidising the means-tested pension benefit system from their own savings and previous National Insurance contributions which means that IFAs could face misselling claims.
Using the example of an IFA that installs a group personal pension scheme advising the employer and not individual employees, he says: “There could be risks right now where an employee on a modest wage retires and discovers that they have been saving only to do themselves out of means-tested benefits. It is only the almost fiendish complication of the means-tested system which may prevent most of them identifying that they have, in fact, done this but sooner or later someone will rumble this.”
Small also attacks the Department for Work and Pensions for arguing that loss of means-tested benefits for personal accounts is not a major issue because improvements to the basic state pension will lift the vast majority of people out of the benefits safety net by 2050.
He says: “It is disingenuous of the DWP to say that it will be all right on the night – advisers must advise on the basis of the known, or reasonably foreseeable risks, as FSA has correctly identified. I am sure that there are many in Government who would wish this issue would go away but until the damaging interaction between means-tested retirement benefits and private saving is addressed, it threatens to corrupt the otherwise laudable aims of NPSS fatally.
“In these circumstances, it seems that IFAs need to be at least alerting client employers and pension scheme members likely to be affected, to the risks of saving, if future claims on themselves or their employer clients are to be avoided – a slightly crazy position to be in when there seems to be a big savings gap.”