For this blog I’d like to cover some personal experiences which I think may be the next pension regulation scandal waiting to happen.
Income drawdown has now become the ‘product’ of choice for those reaching retirement age or in fact those who are reaching age 55. As a financial adviser with years of experience, the Financial Conduct Authority made it quite clear that anyone who goes into income drawdown should have the tolerance to do so. This means ability to suffer losses when inevitably markets end their bullish run and show some negative returns. Through the fact finding process of advice we should build up a picture of the client’s situation taking into account investment experience, other assets, required income and attitude to risk. Only then could a decision be made as to first of all whether drawdown was the appropriate solution and seconds what type of portfolio should be recommended. This is called financial advice and carries with it a liability to the client.
The new pension freedoms are undoubtedly a great thing for those reaching pension age, however it seems there are life companies and other institutions who are offering drawdown without all the checks to protect the client, we were required to do by our regulators, so called non-advised drawdown.
Let me be clear, I’m not saying that people shouldn’t be able to make their own decisions as clearly there are many people who take a keen interest in where their funds are invested and have the confidence to make decisions, but clearly there’s a huge percentage who don’t. It’s these people who are being put into drawdown, because they asked for it, and not understanding whether they had financial advice or not.
I say this from experience of previously working for an organization which offered non-advised drawdown and speaking to clients after they’d gone down a non-advised route. Because they didn’t know what advice felt like, they presumed they had had it.
My second experience of this is my own father, who is with a large life company. He’s a retired accountant and knows his numbers. He’s taken a keen interest in his pension fund and is what I’d call ‘financially astute’.
I told him to speak to his life company first and then I’d have a look at what they’d offered him. I told him what the advice process should be like and what questions to ask. The following week after I saw him again I asked him about the service he’d received and the outcome. He assured me that he’s received advice and been given a recommendation. Great I said, well let me see the financial advisers ‘letter of recommendations’ and I’ll tell you my thoughts. To my surprise it had been done on a non-advised basis and he hadn’t a clue what or why he’d ended up with the portfolio he had. He said that he’d asked for a cautious portfolio, yet the life company had put him into 3 pots with different percentages in each, not told him the funds he was in just Pot1, Pot 2 and Pot 3.
My main fear for both the life companies and non-advised intermediaries is when the markets turn. When there is a significant dip in the global markets which impacts those in drawdown. I wonder how informed or prepared they are to see their one source of income take a hit. For these people there will be no one to call for reassurance or advice and no liability if they run out of money. Investments are and always have been complex, they are not right for everyone, yet the new pension reforms have somehow created a bypass of suitability in exchange for profit.
For years Life companies sold undervalued annuities to their member by not offering the best rates or encouraging their members to declare medical history which could have increase their income. Now it seems that, to retain the profit margins lost by the shift from annuities, drawdown is being mass distributed without sensible consideration for those being put into it.
It doesn’t stop there though. I know that organisations have been set up like machines to target anyone over the age of 55 to release tax free cash. Aggressive marketing tactics are being deployed by call centers telling people to take money from their pensions early, whilst they are still working. Yes, a cash lump sum at 55 would be nice, but chances are, it will be spent and result in a lower pension fund and income available when it’s really needed.
I fear a PPI type scandal in a few years with Martin Lewis at the front banging the drum.