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Pension provider helplines are no substitute for
impartial, independent guidance and advice
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Pension Schemes Bill offers an opportunity for
Government to introduce requirements for better customer
protection against premature or fraudulent transfers
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First line of defence would see providers ask relevant
questions to help identify scams.
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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.