Pensions Freedoms Inquiry Submission
Written evidence submitted by: Chris Budd, Managing Director, on behalf of Ovation Finance Ltd to Work and Pensions Parliament Committee
Ovation provides independent financial advice to individuals and SMEs. We do so by coaching clients about their money, creating plans for their objectives, and applying our technical knowledge. We are pensions specialists.
For a small minority of people, pensions freedoms have made an enormous difference and helped them to achieve objectives that could not otherwise be achieved.
For the vast majority, however, the temptation to access capital from a pot intended to provide income, and often pay additional tax for doing so, has proven too great to resist and is likely to be to their long term detriment.
We therefore believe a change in regulatory approach is needed to protect the majority of the public, whilst allowing the small minority to continue to benefit. We believe this should involve:
- Banning pensions cold calling immediately.
- Change the regulatory rules to only allow transfers from DB schemes where either no advice has been given or if advice has been given which confirms a transfer is the only way for the client to achieve their objectives.
- A moratorium on changes to pensions legislation to allow people to plan for their future.
What are people doing with their pension pots (including defined benefit pension entitlements) and are those decisions consistent with their objectives? Is there adequate monitoring of the decisions being made?
First, as it applies to clients of Ovation.
We have discussed pensions freedoms with our clients and for most of them, the flexibility it allows has not altered their strategy. This is because their pension pots have always been intended to pay a regular income, and therefore the ability to access large amounts of capital from their pension funds has not made a big difference to them.
A small number of clients have expressed interest in accessing their pension pots and in the majority of cases this has not, in our view, been in their best interests. One example is a person who wished to maintain a lifestyle they could not afford, with the likely result being that they will run out of money in the future. Generally, these clients would have paid more tax than necessary and we have managed to dissuade them of their intended action.
We have had a very small number of clients for whom pensions freedoms have been of help. Typical circumstances are where they have other assets and eating into the capital has enabled them to save tax. There have been very few examples of pensions freedoms being used to help clients achieve their objectives that they would not otherwise have been able to achieve.
Second, as it applies generally.
We have had a number of enquiries, as well as met people (for example at networking events) who wanted to talk about pensions freedoms. Where these enquiries did NOT relate to Defined Benefit schemes they generally involve a person paying more tax than they need to in order to ‘get their hands on the money’ (which has often meant tying it up in a buy to let property).
Defined Benefit (DB) Schemes.
We have spoken with a number of people (both clients and not clients) about transferring out of their DB scheme. Our default position is to advise against. In two instances clients have been able to achieve objectives that would otherwise not have been achievable by transferring away from a defined benefits scheme.
We have turned away a number of enquiries from people who do not want ongoing advice but simply want us to arrange the transfer of their DB pension schemes. In some cases, they had already made their mind up that the transfer was going to happen, without wanting to commit to full and objective review process. In one case a prospect chose a different firm as they were more willing to offer a “positive outcome” at outset. i.e. agree to transfer before a full review took place. This sort of practice concerns us.
We have spoken to people who have transferred out of their DB scheme and who have not got round to investing the money, which remains in cash. The investment strategy is a fundamental part of the transfer process and in our opinion they have been poorly advised – if advised at all – and that such transfers are not in their best interests.
Are people taking proportionate advice and guidance and if not, why not? Are people adjusting behaviour in response to advice and guidance?
Are there persistent gaps in the advice and guidance market and what might fill them? Is automated advice and guidance filling gaps as expected?
Many of the decisions to utilise the pension freedoms rules and/or take a transfer from a DB scheme are taken without proper considerations. Whether it is to take more income now, give to children, invest in a business that is struggling or invest in property, we believe that many of the people utilising pensions freedoms will find that they have less income in, say, ten years time than they would have done.
Pensions were designed to provide an income in retirement, not capital. The reason why pensions were inaccessible in the first place was to stop people from taking capital today at the sacrifice of income tomorrow. The very notion that the public need to be have their pensions ‘set free’ is a nonsense.
Financial planning and advice needs to act as a gatekeeper in this area, as well as an enabler in the rare occasions when pensions freedoms and DB transfers are appropriate. Automated advice and guidance is highly limited in acting in the gatekeeper capacity.
Are the Government and Financial Conduct Authority taking adequate steps to prevent scamming and mis-selling?
Firstly, the delays and lack of action in banning pension cold calling is nothing short of an absolute disgrace.
Secondly, the regulatory framework is a muddle, in particular around the ‘insistent client’ rules. We are aware of companies who have set up to provide clients with limited advice on the DB pensions for a fixed fee. We do not believe that any advice on DB transfers should be conducted without full financial planning, including cashflow modelling and an ongoing investment strategy.
We fully expect that when the inevitable pensions scandal results in claims against these companies, they will go into liquidation and their claims will fall to the Financial Services Compensation Scheme. In an unacceptable irony, these claims will therefore be met, at least in part, by the companies that would only help people to access their pensions if their advice.
If the Government want people to be able to access their pensions, then they should stand by this principle, and not seek to shovel the blame for people making the wrong decision onto the advice community.
We would therefore like the FCA to change the regulatory rules to only allow transfers from DB schemes where either no advice has been given or if advice has been given which confirms a transfer is the only way for the client to achieve their objectives.
Are the freedom and choice reforms part of a coherent retirement saving strategy? To what extent is it complimentary to or undermined by other policies?
There are occasions where pension freedoms and DB transfers can help clients achieve objectives that would not otherwise have been achievable. These are, however, a small minority of cases.
We would therefore like the regulatory position to be tightened so that firms who wish to advise on DB transfers require a special level of authorisation or that clients who wish to take a DB transfer are required to confirm that they have taken FULL financial planning (to include cashflow forecasting and an ongoing investment strategy).
Pension legislation should be left untouched for an extended period, to allow people to make decisions without the fear of a legislation change significantly impacting their best laid plans. How are people ever going to be confident in saving for their future if the goal posts keep being moved for political gain?
One area that has been undermined over the last couple of years is the value of guaranteed benefits. For many people this will underpin their income in retirement and with increasing longevity and cost of living, many people might find themselves destitute and overly reliant on the state in old age.