So what have the new pensions freedom and an early 20th century writer, whose works describe labyrinthine bureaucracy, have in common? If you haven’t already guessed, let me explain, writes Mark Soper.
I’m a keen visitor to www.moneysavingexpert.com. So are a great many other people – it is a very good site indeed. And in particular I like to drop onto some of the forums where you can air your concerns and opinions.
When I’m not scribbling blogs like this one, I’m an IFA with a large portfolio of clients who, between them, represent a good cross section of the population. The MSE forums are a quickfire way to check out what people are talking and worrying about, and this helps inform my work.
Occasionally I’ll try and answer a problem too. And this happened recently when a visitor to the forum outlined a situation a 63-year-old friend had encountered. She had a defined contribution pension policy worth £40,000 and wanted to withdraw all of it in order to pay off an expensive mortgage – well aware that only 25% of this will be tax exempt.
The correspondent’s friend had taken the advised route and received free guidance from Pensions Wise as well as The Pensions Advisory Service, and then paid for an hour’s consultation with an IFA.
After receiving that, she remained persuaded to take out her cash – despite the warnings she had received.
Unfortunately this is where her progress towards paying off her mortgage sank into the sands. The pensions company involved – Scottish Provident – refused to accept her instruction without written confirmation from an IFA to show she had received all the appropriate advice – in line, in fairness to them, with what the Act sets out.
No problem you would think. Except that the IFA wanted to charge her nearly £1,000 for the letter.
Was this right, the correspondent asked?
My response was yes… everyone had acted properly. And any confusion is understandable.
Pensions freedom, IMHO (as they say on all the best forums) is fast becoming a Kakfa-like circle – and almost everyone that has contacted RetireEasy has reported similar confusion about how these new found “freedoms” are anything but the sort.
So how have we got into this situation?
Let’s wind the clock back to when the new pensions freedoms were announced last year. They appeared like a magical rabbit out of the Chancellor’s hat – and with good reason (in the words of a well-known professional magician: “You’ll like this, not a lot”). Prior to the announcement, there had been almost no consultation between Government and the pension providers and I understand that there was also very little discussion between Government and the Financial Conduct Authority (FCA).
They had been operating within a well-trodden and well-understood world where the vast majority of all UK pension plans are designed to provide retirement benefits on a fixed pension date that constitutes a 25% lump sum (potentially higher from a company pension scheme) and a fixed monthly pension or annuity.
Changing from one system to another like this is like turning a tanker round. And they have had only a year between the announcement and the reforms going live. I’ve heard of some financial institutions where client records are still in hard copy only, so don’t assume that a new bit of coding on the mainframe will provide an instant answer.
This system – quite simply put – is not compatible with the new pension freedoms allowing 100% cash withdrawal. Faced with a request to take the cash and run (for whatever purposes, worthy or otherwise), the computer will inevitably say “no”.
And why should the providers be more co-operative? Pensions Freedom does not – in fact – constitute a Statutory obligation on the provider to allow more than 25% of the fund to be taken in cash.
Despite what the customer wants, and has been told he can have by the Chancellor, the provider is under no obligation to provide it.
And yes, you would have assumed that the Government would have thought this through before pushing through the changes.
So is there no way to get your money out? Well not all providers are saying “no”. But the ones that say “yes” do add strings.
Over recent weeks and months an increasing number of pension providers have begun to insist that its customers must not only seek guidance from Pensions Wise (which will warn them of the potential downsides of taking out their cash) but also prove they have sought advice from an IFA before the provider will allow the pension to be cashed in. And proving means written confirmation.
But in order for an IFA’s advice to be compliant he/she must present the most suitable outcome for the client – and there will be many alternatives for the IFA to consider other than the 100% withdrawal of the pension fund. That can take a lot of time to compile, believe me: hence the £1000 estimate.
And doing a quick and dirty job on it is not an option.
In March this year the FCA announced that in March 2016 it will commence a review of the pension freedom advice dispensed by IFAs. As a result of this impending review, you will appreciate that IFAs need to be very careful in handling pensions freedom enquiries: the prospect of being hung drawn and quartered a year or two down the line because the advice given has holes in it is not an appealing prospect.
So yes, some IFAs will respond positively and offer to provide the written advice – and charge fees for the work that needs to be done to deliver all the alternative client outcomes. But many RetireEasy subscribers tell us that IFAs, rather than run the risk or handle the hassle, have simply refused to deal with “insistent” customers and have referred them back to the pension provider.
Which was, if you remember, pretty much where we started.
So, in summary, we are left with what I will call “The Kafka Circle”. Or for those who are more acquainted with the work of Joseph Heller, the “Pensions Catch 22”:
1 Client requests provider to pay out pension fund in cash.
2 Provider points client to Pensions Wise.
3 Pensions Wise points client to IFA.
4 IFA considers client request and suggests 100% encashment probably a bad idea.
5 Client insists to IFA that he/she needs the cash and wants proceed.
6 IFA re-states the pitfalls and sets out fee for conducting a full review.
7 Client declines advice/fee and insists that the cash is paid out.
8 IFA declines request and points client back to the provider.
9 Client requests provider to pay out pension fund in cash….
All this, and we still have the prospect of further reforms hoving into view, whereby existing annuity holders will be able to take their money elsewhere… it promises to be a long (and confusing) next 12 months.
On the plus side, you’ve just read a financial blog that has managed to weave in the works of two literary greats. You don’t get that every day.
