- ABI report confirms that the pensions industry needs to do more to ensure customers are properly informed and protected.
- Pension provider helplines are no substitute for impartial, independent guidance and advice.
- Pension Schemes Bill offers an opportunity for Government to introduce requirements for better customer protection against premature or fraudulent transfers.
- First line of defence would see providers ask relevant questions to help identify scams.
- Second line of defence would be ensuring people have impartial guidance or advice.
The Report released by the ABI is an important addition to the debate around pension freedoms. However, it draws conclusions which are not necessarily in the best interests of customers. There is clear evidence that customers are cashing in their pensions in far larger numbers than ever before, but that does not prove that these decisions are incorrect.
Of course, it could be that too many people are taking ‘too much’ money from their pensions. Some undoubtedly are doing so, but we do not know how many of the full withdrawals are inappropriate and how many will face later life poverty as a result. The evidence is so far incomplete.
This ABI report still does not seem to offer the full picture of what is really happening with pension withdrawals. To know whether those people transferring their pensions in full are risking later life poverty, requires knowing the size of the fund being cashed and what other resources and pensions that person has.
Most people have several pension funds and, if they are withdrawing one but still have others, they will not be at risk in the way suggested. We just don’t know and proper analysis is urgently needed to see the full picture. It is five years since the new regime was introduced and we need to know much more than we currently do.
For those people who are unaware of the ramifications of taking money out too quickly, the PensionWise service was designed as a free guidance facility for the public that could help them make better decisions. The service is excellent, but take-up has been woefully low. If more people had used either this impartial free guidance, or better still sought independent financial advice from a regulated, authorised expert adviser, we could be more confident that the freedoms were serving customers well. The real benefit of the pension freedoms is that people can keep money in their pensions into their 80s and 90s, without fear of punitive taxation and without having to buy a poor value, annuity with no inflation protection for their income, so their pension loses value in real terms over the years.
Unfortunately, it is clear that people are not getting the free guidance they were intended to have when pension freedoms were announced. The answer to this problem of people not receiving the help that was designed for them to enable them to make the most of the new pension regime, is not to just allow pension providers to offer the guidance instead. Such a move would put customers at risk of being sold unsuitable products, rather than having the truly impartial help that they need.
I have tried to suggest amendments to the Pension Schemes Bill to cater for this and to set up better lines of defence for customers who call their pension provider asking to transfer their pension or withdraw their funds.
The first line of defence would consist of providers asking a few basic questions, which could help identify scams and prevent customers moving their money to fraudulent schemes. In particular, asking whether they received a cold call which initiated the transfer request, whether they know the person who recommended this course of action, whether they know anything about the investment they want to move to, or whether they have been to PensionWise or used an IFA, could help protect customers better. The second line of defence would be to urge the pensions industry to automatically send people to the free guidance service if they have not had professional, regulated advice. The ABI proposes risk warnings, which is a good idea, but not sufficient to protect customers adequately.
Ideally, everyone should be directed to PensionWise as a first line of defence against making poor decisions but less than one in ten people are using this excellent service. Talking to a pension provider’s helpline is no replacement for independent unbiased guidance or advice. I understand why providers would prefer to help customers in this way, but that is not the right answer. There needs to be far more automatic use of PensionWise before people take money out of their pensions. That way, someone can explain to them why withdrawing or transferring is not a good idea and explain there are many advantages to keeping money in pensions rather than paying tax on large withdrawals.
There is an opportunity in the current Pension Schemes Bill to improve the protection for consumers. I do hope the Government will recognise the need to do so, not least because pensions have significant amounts of taxpayer funding as a result of generous tax reliefs, and if people do not spend their pensions wisely, or do not realise the advantages of keeping them till much later life, then future Governments will have to deal with many more poor pensioners in years to come.
The ABI and its members have an important role to play in protecting consumers better – and I also urge them to conduct more in-depth research to identify a fuller picture of people who are using the pension freedoms.