28 June 2018
PPI – The Sequel
The next mis-selling scandal to hit your phones will be pension transfers.
by Frank O’Nomics
Is it me or have those intensely irritating PPI calls started to drop off? Once we got beyond the stage of actually wondering whether we really might have a valid claim, the equivalent of financial “ambulance chasers’” provided an almost daily annoyance, and so it is with great relief that we are able to contemplate the World Cup or Love Island without interruption. However, there are signs looming that we should not get too comfortable. The huge number of people who have been persuaded to transfer their (often gold-plated) guaranteed pensions, for a short-term cash incentive, look likely to be the next wave of individuals who, too late, work out that they may have been ripped-off. Already a number of platforms have been censured and forced to withdraw and it seems just a matter of time before the legal fraternity seeks out clients to persuade then to sue for redress. The questions that arise are: why do people get talked out of their DB pensions in the first place, and how can we avoid becoming involved?
Last year £36.8bn was transferred, much of it from final salary pension schemes, and the first three months of this year saw £10.6bn moved. Since 2015 you no longer have to buy an annuity with your pension savings, and can now take 25% of the pot as a lump sum and invest the balance elsewhere. At its heart there lie two key issues for pension transfers. First, the temptation to unlock a chunk of your pension pot to realise cash. Some may want to blow it on a car or a holiday; others will want to help children or even grandchildren onto the property ladder. The other temptation is that the sums being offered often do look very large indeed. There have been instances of people being shown as much as 35 times their final salary in return for walking away from the guarantee. Given that the government assesses the value of your pension pot at 20 times your salary that does sound very attractive. It seems even more attractive if you have some doubts about the ability of your pension provider to stay solvent. The rally in the stock market has helped to erode a significant proportion of many pension deficits, but they could quickly return and, if your scheme has to fall upon the Pension Protection Scheme, you risk losing up to 20% of your pension income as a result.
The problem is that those that are advised to take their lump sum and invest the balance into a Sipp risk the adverse consequences of a sharp stock market correction – the chances of which are rising given overvalued equities, a growing trade war and Brexit uncertainty. While some financial advisors are charging as much as 5% on the transfers (and sometimes ongoing charges) others are avoiding getting involved and one can see why – a modest fee could turn into a significant claim. However, those transferring more than £30,000 are obliged to seek advice, so someone needs to help. There will be long-term uncertainty as it may take more than 10 years for issues to arise – although claims management companies are already targeting those people who mention pensions on social media, offering to help them seek compensation for poor advice.
Research released this week suggests that an alarming number of people are not being smart with the money that they have released from their pensions. The study of the £17.5bn that had been taken out since pension freedoms began in 2015, showed that a lot of people have very sensibly used the money released to pay down debt (around £3bn), but more (£4.5bn) has just been parked in low yielding current accounts and Isas, which will not be generating the same returns as their pension fund did. £2.3bn has gone on holidays, cars and home improvements, while surprisingly little has been used to fund care (just £60mn). £1bn has gone into buy-to-let property and £1.2bn has been used to help children.
Surely this is the point of pensions freedom? Saving is just the process of deferring consumption and it is reasonable that, having retired, people want to spend their savings. The problem comes when that money runs out. Pension schemes release money to people gradually so that they can afford to fund a long retirement. When their residual pot becomes just too small to generate enough to sufficiently supplement their state pension, people are very likely to rue their profligacy and blame those that advised them to access the money. Cue the arrival of lawyers and a tsunami of claims against pensions advisors.
The Financial Conduct Authority has alerted the trustees of company pension schemes to the prospect of unscrupulous advisors trying to talk their employees out of defined benefit schemes, and they have pointed out that such transfers are unlikely to be in the interests of most employees.
None of this gets to the really frustrating part of this next wave of “cold” and automated telephone calls. So many of us did not have the luxury of a defined benefit scheme to be talked out of in the first place. While defined contribution schemes could provoke similar issues, we still don’t need someone in a call centre regularly reminding us that, in the pensions lottery, we were the ones that lost out from the outset. No one will be able to create a legal case for that.
