Funny how, when faced with a blank piece of paper, you can be hijacked by the first information that you see on the day. So today I have unexpectedly ended up back on the topic of pension freedom.
In the last year or so we have started to get data on who has done what, how much money has been taken out and in what form.
My thoughts at the time were, “all well and good but let’s wait until we get some client views – more subjective data as opposed to objective”.
In many of the pension sessions that I have done over the last year, I have prefaced my talk by asking the audience how the pension freedoms have affected their business and, by extension, their clients.
The big consensus has been that clients have benefited from the new rules in one way or another by working in conjunction with their adviser.
Tax implications
A good example was a case recently described to me by an adviser. The client came in to see him wanting to draw a net £200,000 from his pension fund in order to purchase a flat for his son who was going to university.
Having gone through the tax implications of such a withdrawal, the client changed his mind and went away with a mortgage instead to fund the purchase.
This seems to me a good example. The client has seen a pension freedom opportunity and asked his adviser. The advice process has shown it is not the best route and they found an alternative way of achieving the goal.
I also use this as an example of what might happen if we changed the tax structure of pensions from exempt, exempt, taxed (EET) to taxed, exempt, exempt (TEE).
Without the tax on the withdrawal, would the client have taken the money out without thought and then had less to fund his retirement? The ‘tax barrier’ has been a good sense-check!
Anyway, I digress. Back to pension freedom. A couple of things caught my eye.
Firstly, information from Citizens Advice showing that, of those who had received warnings from providers (the so-called ‘second line of defence’), just 1.6% had changed their mind as a result of these warnings.
The figures are very low and I think confirm that the non-advised are more likely to make encashments.
It is not surprising that so few are dissuaded by the warnings from providers. The decision has been made, the money requested and then the warning is provided – unlikely to be effective!
Providers will continue to provide warnings – they are told to by the regulator – and if there is any residual liability for poor outcomes they will not want any of it.
For me, all of this points to having warnings and information much earlier in the transaction, with examples of what might happen in different scenarios.
The second piece of information was from the Financial Ombudsman Service, illustrating the top issues that they are being asked to address about the pension freedoms.
In a world where we see an increasing number of pension complaints, complaints about the pension freedoms are a growing subset, and these are interesting to reflect on because of the insights they provide into the consumer mindset.
We have a problem
The key subjects appear to be administration errors, exit fees, delays, misinformation and the requirement to take financial advice for certain transactions. (Interestingly, if you asked someone before April 2015 to make a list of likely problem areas then most of these would be on that list!)
In these days of automated customer service, where you can order an item and have it with you on the same day or at worst the next day, the financial services industry with its ‘legacy’ products, occasionally ‘older’ IT and often manual systems does not bear comparison.
This is mitigated somewhat by the fact that we are dealing with money and we must make sure that the money goes to the right person and into the right account. I think you could also argue that the pension freedoms policy was announced at short notice with a short deadline and to some extent the industry did well to be ready by the launch date, even though some of the procedures and processes had yet to be tested.
As for exit fees, we know these are subject to a current consultation, so there are clearly issues there that will require some thought.
The requirement for financial advice for certain transactions is also a difficult one to address, particularly with regard to defined benefit (DB) transfers. In essence, if you believe in the principle of pension freedom and accept that some people might spend their pension fund rather than provide a lifetime income, then why differentiate between defined contribution and DB?
I also think that we ought to reconsider the need for advice on DB transfers and to see if there is any other way to regulate. Forcing people to pay fees seems against pension freedom as it stands.
With all this in mind, we are just starting to get a feel for the impact the pension freedoms are having. But the true effect will only be evidenced once we can see the established patterns of outcomes that consumers are creating.
Mike Morrison is head of platform technical at AJ Bell
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