01May

The pension freedoms introduced on April 6 2015 gives consumers aged 55 and over almost complete flexibility regarding how much of their retirement funds they can access. But with these freedoms comes a new challenge for financial advisers – how should they advise customers wishing to access their pension funds, and how should they deal with clients who wish to go against their advice (the so-called ‘insistent client’)?

Essentially, the options now open to a client on reaching 55 are:

• Take out a traditional pension annuity, providing a guaranteed income for life
• Effect a ‘flexi-access drawdown’ plan, where income taken from the pension fund can be varied over time
• Withdraw lump sums from the pension fund as cash (an Uncrystallised Funds Pension Lump Sum, or UFPLS)
• A combination of the above steps
• Do nothing for now, and leave the funds invested

If the drawdown or UFPLS option is taken, then the main concern is that pensioners will withdraw too much of their retirement fund and be left much poorer later in retirement. But while they remain the only way of receiving a guaranteed income for life, and the only method that does not involve predicting life expectancy, annuities remain poor value in many people’s eyes. Annuity rates fell to an all time low on April 23 2015.

The Association of Professional Financial Advisers (APFA), a trade association for financial advisers, has now called on the regulator, the Financial Conduct Authority (FCA) to provide guidance to advisers on this topic.

Chris Hannant, APFA’s Director General, said:

“We welcome the extension of the new pension flexibilities to those people currently in DB schemes and are pleased the government continues to place financial advice at the heart of consumer safeguards.

“Our engagement with the FCA on this consultation leads us to conclude that under the new pensions regime, nearly all advisers who want to continue offering retirement planning services will need a Pension Transfer Specialist qualification. We need clarity as to under which precise circumstances these qualifications would be required for consideration of DB benefits.

“The FCA must also give the advice industry greater certainty on where and how liability would attach for advice to ‘insistent clients’ who want to go ahead with a transfer against advice.”

The extension of the flexibilities to those in DB schemes that Mr Hannant refers to relates to the fact that when the new freedoms were first announced in the 2014 Budget, they were intended to apply only to those in defined contribution (money purchase) schemes. Since then, it has been announced that customers in defined benefit (final salary) schemes can take advice as to whether it would be appropriate to transfer their fund to a defined contribution scheme, and then to take advantage of the freedoms. However, there is still confusion about whether any adviser giving such advice would need a specialist pension transfer qualification, such as the Institute of Financial Services’ Award in Pensions Transfers, or the former G60 examination.

Advisers are already reporting that clients are contacting them seeking to withdraw more than the 25% tax free lump sum from their pension fund, regardless of the consequences this might have in terms of eroding the pension fund and/or pushing them into a higher income tax band.

Keith Richards, chief executive of the Personal Finance Society, has already advised his members not to process insistent client cases, unless the Government can guarantee that advisers would not be held liable for any future complaints from these clients.

One reason the FCA might not respond swiftly to APFA’s request is the impending General Election. In the run-up to an election, announcements from the financial watchdog are usually few and far between.

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.