Freedom vs protection: Providers split on need for pensions advice


Providers are caught in a “perfect storm” between consumer demands for access to pension freedoms and ensuring customers are adequately protected by advice.

Over the past week national newspapers have slammed pension providers for blocking savers from accessing the pension freedoms.

“Expensive” advice costing up to £1,000 has been listed alongside high exit charges and delays as barriers to the freedoms.

And with widespread confusion over when advice is required, experts are warning the reputation of the advice profession is being damaged.

Different approaches

The Government has mandated that savers with safeguarded benefits worth more than £30,000 get regulated advice before taking their pot as cash.

But providers are adopting different stances on when advice is required beyond that, with only some making advice a requirement for entering income drawdown.

There are also a number of complications with the £30,000 advice requirement.

An FCA spokeswoman says the £30,000 limit applies to the benefits in any single scheme, and not the total across an individual’s schemes.

But providers say the rules are unclear.

Royal London and Standard Life both say they look at all the benefits under the same scheme when determining if the £30,000 limit has been breached. This means a customer wanting to access a pot worth £20,000 who has over £30,000 worth of safeguarded benefits in the same scheme would still need to take advice.

A spokeswoman for Standard Life says: “The rules are not very clear and there is scope for providers to take different approaches. Either the Department for Work and Pensions or FCA should provide clarity.”

A spokeswoman for Royal London adds: “There is some confusion as some customers believe the £30,000 limit applies to each pension pot they hold and are then upset when it is explained to them that they must seek advice when the smaller individual pots total £30,000 or over.”

Rule changes

Another point of contention is whether the value of the guaranteed annuity rate should be taken into account when assessing whether the scheme exceeds the £30,000 limit.

Providers say the FCA’s consultation paper on pension transfer rules, published in March, was not sufficiently clear.

In the final rules last week the FCA said: “A number of respondents asked whether providers should attempt to value the GAR for the purpose of determining whether the exemption from the advice requirement applies.

“The DWP has confirmed that, where the benefits include a GAR, the calculation of the value of the benefits must take into account the value of the GAR.”

A Standard Life spokeswoman says: “Until now we have not been including the GAR in our calculations. We are reviewing the final rules and will be making any necessary changes to our processes.

“A very small proportion of our customers have GARs – we have approximately 4,700 policies that have a GAR which equates to less than 0.25 per cent of our UK pension book.”

Phoenix, on the other hand, says it has been taking the GAR into account since April. The closed-book provider says 70 per cent of its annuities have a GAR.

A spokesman says: “If a policy has a cash-in value of less than £30,000 but with benefits worth more than that amount, the customer will be required to take advice.

“We calculate this by determining the cost on the open market to provide the level of annuity that the GAR would provide to the customer, rather than simply the cash-in value.

“Our biggest concern is that customers try to cash in a pension with a GAR without first understanding its value.”

Barnett Waddingham senior consultant Malcolm McLean says: “There is widespread confusion about the whole thing.

“For those with a GAR who have been allowed to transfer without advice but would now need advice under the new rules, there is a question over whether they have been adequately protected.”

Standard Life head of pensions strategy Jamie Jenkins says providers will have to contact those customers and make them aware that under the new rules they should have taken advice.

He says: “This will only apply to those who had a valuation of between roughly £25,000 and £30,000, which will be just a small percentage of customers.

“But providers will need to tell them that with hindsight they should have taken advice and make sure they are fully aware of the benefits of the GAR.”


Consumers are also reporting cases where they have been mistakenly told they need advice.

An Aviva customer wrote to the Guardian earlier this month to say they had been told by the provider they had to take advice to access a £20,000 pot.

An Aviva spokeswoman says the provider “misunderstood” the customer’s request and on review accepted advice was not required. The spokeswoman says the confusion arose because the customer asked to “draw down” their fund, which was mistaken as a request to enter income drawdown.

The Pensions Advisory Service chief executive Michelle Cracknell says: “There is an issue with providers communicating the advice requirements and it is not always the provider’s fault.

“In a lot of cases customers have had unrealistic expectations about how easy it was going to be to access the money, and sometimes they do not fully understand what they are being told.”

She says among the misunderstandings that consumers have reported to the TPAS helpline are those who are transferring to a new provider which will only accept business on an advised basis.

Cracknell adds: “In April we also had people calling who had a pot worth £20,000 with a GAR and were asking if they need advice. We said at the time we did not believe so, but the FCA has now clarified they may need advice.”

Negative press

Others are concerned about the negative way advice is being portrayed in the national press.

Work and Pensions Secretary Iain Duncan Smith wrote in the Telegraph at the weekend that he is ready to “name and shame” providers who are putting obstacles in the way of those wanting to access the freedoms.

McLean says: “It is absolutely wrong for the Government to start criticising providers for insisting on financial advice.

“The Government needs to make it clear that this is their requirement and it has been done in the consumer’s best interest. In many cases people will be ill-advised to give up safeguarded benefits, but you get the impression from Iain Duncan Smith that providers are doing this for the hell of it.” chief executive Karen Barrett says: “The press is flagging up this £1,000 fee for advice like it is a fee for nothing. They are not talking about what you get for that: a professional acting in your best interests to help you make the most of your money.

“The Telegraph over the weekend listed exit fees and advice among the ‘penalties’ preventing people from accessing the freedoms – but advice should not be in that list. It is not a penalty: it has been put in place by the Government and providers to protect people.”

Apfa director general Chris Hannant says he is concerned the pension freedoms are being portrayed as an “unquestioned good” that consumers are being barred from.

He says: “Defined benefits are very valuable and the message has been slightly lost that cashing in your DB benefits may not be in your best interests. Consumer personal finance journalists have not covered themselves in a great deal of glory by encouraging people to cash in their pensions.”

EY senior adviser Malcolm Kerr says: “Some consumers and newspapers are only just waking up to the fact that advice costs money. It is also very valuable but to a consumer, ‘I want to take my money’ is a very simple transaction and they cannot understand why it is complex.

“This is a great campaign for newspapers as it puts them on the side of their readers.”

Kerr adds that providers are finding it difficult to meet customers’ expectations without exposing themselves to unnecessary risk.

He says: “Providers have found themselves, through no fault of their own, in a perfect storm. You have the FCA, the Treasury, the DWP and of course consumers making a lot of noise.

“But the bottom line is that insurance companies will have different appetites for risk, and the last thing they want is someone coming back to them claiming they should have been advised not to spend all their pension.

“I can fully understand why some providers are taking the better safe than sorry approach, but at the same time consumers want access to their money and are becoming increasingly impatient.”

Expert view

Karen-Barrett-in-office-in-2014-700.jpgOur research shows that a £1,000 fee for advice would typically be for a pot of £100,000. For a pot of that size there are lots of different options and advice is really valuable.But the consumer press is flagging up this £1,000 fee for advice like it is a fee for nothing.

They are not talking about what you get for that fee: a professional acting in your best interests to help you make the most of your money.There will be a lot of people, particularly those with pots of £100,000 to £200,000, who initially went to their provider wanting access to their cash but were told they needed advice and benefited hugely from things like tax savings.

Consumers are often not aware of the tax implications, let alone things like enhanced annuities. The Telegraph over the weekend listed exit fees and advice among the ‘penalties’ preventing people from accessing the freedoms – but advice should not be in that list. It is not a penalty: it has been put in place by the Government and providers to protect people.

I do not think it is expensive: for £1,000 you get reassurance you have made the right decision, a professional who you can go back to in future, if you are buying an annuity potentially an improved rate from shopping around, tax savings and protection from making the wrong decision. That is a bargain. And what is the cost of not taking advice and rushing into a decision which may not be right for your circumstances? I would say it is more than £1,000.

Where people have to take advice, we should be explaining to them that they are in the group of people the Government has decided need to take advice, and yes there is a fee but overall you should be better off as a result.

It is not right to say advice is expensive without talking about the value. Advisers need to be out there in the press talking about what they have done for their clients, and will be doing our best to promote that message.

Karen Barrett is chief executive of

Where providers stand on customers taking advice

All providers are required by the Government to mandate advice for schemes with safeguarded benefits worth more than £30,000.

Aviva: Requires customers to take advice where they are transferring into an income drawdown product, and where transferring to Aviva’s adviser platform. Has valued the GAR when testing against the £30,000 advice requirement since April. Treats each GAR policy separately when testing against the advice requirement.

Friends Life: Until now has not included the GAR when testing against the £30,000 advice requirement. Treats pensions as the same pot where they are under the same scheme rules, and separately where they are not.

Phoenix Life: Since April, the closed book provider has taken the GAR into account when valuing pension pots.

Standard Life: Benefits under the same scheme are considered together when testing against the advice requirement. Until now has not taken the GAR into account when valuing policies, and says it is currently reviewing the new rules.

Zurich: Those using Zurich’s pension platform, which is an intermediated business, will need advice before accessing their money. Says it is reviewing its calculation approach following the FCA rules on GARs.

Royal London: Requires customers to take advice when accessing any safeguarded benefits where their total safeguarded benefits under the scheme are worth £30,000. Since April has not taken the value of the GAR into account but is currently reviewing its approach.

Old Mutual Wealth: All new customers opening a pension account with Old Mutual must take advice. Customers transferring between Old Mutual products are not required to take advice.

Canada Life: Since April has not taken the GAR into account when valuing customers’ pots. Is in the process of revising its policy to include this.

Prudential: Those going into income drawdown must take advice. Says it is reviewing its calculation approach following the FCA rules on GARs.

Adviser view

Chris Daems, director, Cervello Financial Planning

Currently there seems to be a focus on the expense of advice without fair focus on its value. Working with a financial planner can help individuals who want to use the freedoms to avoid expensive mistakes, have greater clarity on the most appropriate approach and plan appropriately for their financial futures.