Is it possible that the new system of personal accounts will create thousands of pensions lepers – people who will be beyond the scope of financial advice? It is being suggested that once auto-enrolment is introduced, there will be a group of untouchables who, having opted out of the occupational pension their employer is compelled to provide, could not be advised by advisers without accusations of misselling. This could apply to existing or potential clients. So how real is the threat?
Steve Bee, head of pensions strategy at the Royal London Group, believes this is a significant and under-recognised issue facing advisers.
He says: “In the old days, there were two types of employee – those that were members of an occupational scheme and those that weren’t. Those that were in occupational schemes were off limits to advisers because no one could realistically be advised to opt out of their company scheme.
“Post-auto-enrolment, there will be two types of employee – those that are in company schemes and those that have opted out. Once someone has opted out, they will be a pension leper – how many caveats would you have to offer as an IFA to advise that person? It would be impossible. This issue should be concerning IFAs for their existing clients and those they will no longer meet.”
The Government is concerned that employers will coerce people into opting out to save themselves money, as has happened with the working time directive and as a result there seems likely to be considerable bureaucracy around opting out. Employees will have to send a letter to the DWP rather than their company and will have to be advised that it may affect their income in retirement. The personal accounts legislation has also made it clear that employers will not be allowed to pay their contribution as anything other than a pension.
There are valid reasons for opting out of personal accounts, means-testing being probably the most important.
Evolve Financial Planning director Jason Witcombe says: “If you only get basic-rate tax relief and then the pension you get erodes your means-tested benefits, you are in trouble.”
Aegon Scottish Equitable head of pensions development Rachel Vahey agrees. She says: “For most people opting out, the biggest driver will be because they can’t afford it. Means-tested benefits is a particularly tricky area.”
Another potential issue is inheritance tax, where lump-sum death benefits from personal accounts could potentially be liable for IHT. But Vahey believes this is less of an issue as many people with personal accounts would not be going near the limit anyway.
But does opting out automatically rule out advice? Witcombe believes it will be possible to advise opted out people as long as there is a clear reason for their decision.
He says: “It would probably be easier to do this than try and recommend one product over another based on investment flexibility or something, when the only real difference is high commission.”
Vahey also believes that as long as advisers go through it step by step and are transparent and clear, they will still be able to give advice.
Axa Winterthur head of pensions development Mike Morrison believes that many pensions savers will just take a “keep calm and carry on” approach rather than opt out.
He says: “They will probably opt in to their company scheme and then continue doing what they have always done on the side. You might be saving a bit more than you need but unless you happen to be losing it through means-testing, it’s no bad thing.”
According to Morrison, the real problem comes in paying for advice. If people opt out because they cannot afford a personal account, they cannot afford a personal pension, so there is no potential commission. This option will be curtailed by RDR but there is always the option of charging fees. But Morrison says these people are unlikely to have the wherewithal to pay fees for financial advice either.
One solution would be for employers to pay for advice for their employees and this potentially represents a good opportunity for advisers.
Morrison says: “With the scheme as it is, it would make sense for IFAs to work for employers. There would be some incentive that could be passed from the employer to the IFA and given as a benefit in kind to the employee.”
Witcombe says: “If there were some tax breaks or an obligation for companies to bring in financial advisers who could sit down with employees face to face, it could work.” But he says this would need lighter-touch regulation to allow advisers to speak to big number of people. “We could not do a 30-page report for each of them.”
If not, the current system needs to provide for some sort of decision tree or information campaign to enable people to make the correct decision on opting in or out.
Certainly, any resolution to the issue for advisers is unlikely to be coming from politicians. The Conservatives will not change the auto-enrolment requirements, according to Bee, who has spoken with Teresa May on the issue.
It looks like within the current personal account structure, the main opportunities for advisers will be on the corporate rather than the individual side. Advising people for £50 a month pension contributions was unlikely to be profitable for advisers in a post-RDR world anyway.
Aviva head of pensions marketing Paul Goodwin says: “Advisers hold a lot of the relationships with small businessowners and others who need to know what is going on. These people will turn to those they know and trust as to whether the personal account scheme or an alternative scheme is appropriate.”
There are undoubtedly a group of people for whom it will be very difficult to provide cost-effective advice post-auto-enr-olment and the impact of pensions on means-testing is a real issue for the Personal Account Delivery Authority.
The extent to which these would have been important clients for advisers in a post-RDR world is debatable but this is yet ano-ther issue on which advisers will need clarity in the run-up to 2012.