Pension freedom, which came into force in April 2016, heralded massive changes for retirement planning giving defined contribution savers unfettered access to their pots, subject to taxation, from the age of 55.
The reforms, first announced in the 2014 Budget, were billed by the government as the biggest changes to pensions in a generation.
This month’s RP Inquiry asked advisers to share their thoughts about the first 12 months of pension freedom and gauged opinion on whether the changes benefited the advice profession as a whole.
The reforms opened up the income drawdown market to far more people. Firstly, RP asked advisers if they had written more drawdown business in the past 12 months.
More than half (54%) said yes; 20% said no; and the rest, 26% said drawdown business had remained the same.
Of those who said ‘yes,’ many commented that clients had a renewed sense of enthusiasm about pensions because of the reforms but full understanding was still limited.
One adviser said: “Clients are enthusiastic about new possibilities the prospect of pension used as a cheap ‘family trust’ gives a whole new aspect to pension provision, including IHT protection.”
A second commented: “Clients appear as confused as ever. However, I feel pension freedom has certainly been a breath of fresh air to clients in general and pensions are now the buzz word.”
Others said while their drawdown business volumes had increased it was not down to the reforms.
“A lot of it would not have been written without pension freedom,” said one adviser.
Another added: “Not necessarily due to pension freedoms but more to do with efficient planning against tax relief at its current level and crystallisation against £1.25m rather than wait until £1m LTA limit.”
One who reported increase drawdown business said: “We have only actually advised on one annuity since April 2015.”
A second commented that they had put up their fees due to regulatory and professional indemnity insurance cover “but the business kept coming”.
Of those who said ‘no’ or that business levels were the same, many pointed out that suitability was still paramount.
“As a company, we resolved that we would only carry out work under the pension freedoms if it was in the client’s best interest. If the client was insistent we advised them to contact the provider direct,” said a respondent.
I must insist
Prior to pension freedom coming into force, there was much discussion about insistent clients and how advisers should deal with them.
It was predicted many clients would go against adviser recommendations and access cash when it was not in their best financial interest.
However, RP’s research shows 70% of those surveyed had not had to deal with an insistent client in the past 12 months. Although a quarter (25%) of the 122 people who responded had dealt with an insistent situation. The rest, 5%, had no opinion.
One adviser who had dealt with an insistent client said: “In one instance our company refused to deal with a client wishing to access a £1.27 million final salary fund.”
Another said: “At the point of making a company decision to not deal with insistent clients I had a husband and wife both new clients come in – both aged 55, both very recently diagnosed with horrible lifestyle but not life expectancy threatening diseases – who am I to refuse their wishes?
“This materially changed our position.”
Many others confirmed while they had dealt with insistent clients they had not transacted the business. Many advisers pointed such clients directly to their provider.
One adviser said he had transacted ‘insistent’ business but only as an “extreme exception” as they were long-term clients. “We will not deal with insistent clients as a general rule and we will certainly charge an appropriate fee,” the adviser explained.
Another added: “We have had enquiries but not one of them developed into clients – partly due to our charging structure, partly due to explaining the issues to them before being in a position to act for them.”
Several other advisers said they would not deal with insistent clients and some said their networks would not permit that type of business.
Joe Public
RP then asked readers if, in their opinion, the reforms had worked for the end consumer. Some 64% said ‘yes’, 12% said ‘no’, and the rest, 24%, were on the fence.
Many who commented caveated their support by saying pension savers still do not understand the implications of their actions.
“Overall the reforms are a good thing but people are using their schemes as cash cows without thought of how they are going to manage long term,” said one adviser.
A second added: “Clients are no longer limited by the max GAD and are happy that they have the option to take any income from pensions. However, there are always factors to consider such as IHT and income at retirement in order to maintain existing lifestyle.”
A third commented: “Greater flexibility if handled properly has to be a good thing. The death benefit changes are more significant and game changing for most wealthier individuals.”
“In most cases the answer is yes,” a fourth adviser said. “Some clients are narrow-minded though and think they know what they want. We work with these clients to explain the risks and restrictions of having access to their pension funds. While it is a good thing, it is something else that blinds some clients.”
Others had less faith in the system: “A very good fit for some, a path to reckless self-impoverishment for many.”
“While the freedoms have given more perceived flexibility and freedoms, I do not believe that this is the case. The freedoms have added more confusion from individuals thinking they have greater tax-free access than they do,” said another. “Could the same result have been achieved by removing the minimum secure income limit from flexible drawdown?”
Another adviser commented: “I am unsure as to whether the reforms brought in have achieved any significant change for the end consumer. The reforms have added yet another layer of complexity for the end consumer and if they fail to seek advice there could be serious long-term consequences.
“The Pension Wise service is meant to offer a route to advice but my experience of individuals that have used it is simply that they are told they need a ‘letter’ from an IFA before they can proceed. It does not seem to suggest that the value of advice is being explained fully. “
A boon for advisers?
Finally, RP asked if the reforms had benefitted the advice sector. The majority, 71%, said ‘yes’; 13% said ‘no’; and 16% were ‘unsure’.
One adviser said it had created an “entirely new dynamic” and the changes were “the best thing to happen since the 2006 damp squib”.
Others said the reforms had raised awareness of pension planning and the need for advice: “I have seen more people start to save into pensions because of the freedoms so for me this can only be deemed as a positive step.”
Others highlighted how complex pension freedom had made retirement planning meaning adviser services were in high demand.
“It promotes an advice-led culture,” said one adviser. Another commented: “People have more respect for us because we’re the guys with the knowledge.”
However, others were firmly in the ‘no’ camp: “It has made offering professional advice even more complicated and added further documentation to annoy and confuse the client.”
Another added: “The clients have benefited from sound pensions advice, but compliance is a nightmare, so it has not helped IFAs.”
A third said: “Much more work, dealing with enquiries, explaining the rules, etc for little or no additional profitable business.”
“The whole industry is frightened of possible comebacks in the future should clients complain that they were not given proper advice when pensions are encashed – irrespective of how strong the covering letter makes it perfectly clear that it is not a recommendation – even for relatively small sums,” warned another IFA.
But one adviser needed a little more time: “Ask me next year,” they said.
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