Pensions and Pontius Pilate
This is going to be a remarkable year.
In April we’re going to see the most radical reform in pensions market in its history. Then I suspect we’re going to see an explosion of activity as people take advantage of the changes. In the space of a few weeks we’ll see the beginnings of changes, the effects of which will take a generation to fully understand and comprehend.
Immediately after the April reforms we’ll have a General Election and a new government will have to make an early and important call: do they stick with the reforms or do they button down the edges?
I’ve got form on this topic. I can see great opportunities but immense dangers. For me the biggest concern is that customers’ pension assets will be used and abused outside the confines of the protection afforded by the regulated financial services sector, in particular the buy-to-let sector.
I recall only too well in 2004 the then Labour government’s proposal to enable SIPPs to purchase residential property. It caused an unseemly tidal wave of marketing by the buy-to-let sector telling potential clients that they could now get tax relief on their properties. Fortunately just as the great transfer of assets in pensions to property was about to get underway the government had the courage to do a U-turn and rather unsubtly binned the proposals.
This time there won’t be any such U-turn. Consequently, the danger is that people with substantial pension funds will be encouraged to withdraw them, probably on poor tax terms, to invest in a buy-to-let property or worse, put down a substantial deposit on a mortgaged buy-to-let property.
I’ve already seen financial advisers openly complaining on Twitter about clients calling them up wanting to make what can only be described as bonkers financial decisions. For example one recently commented on a client wanting to withdraw £50,000 (after a hefty tax charge) to pay off a current mortgage at 1.5% interest.
Now I’m delighted to hear more and more people expressing their reservations about the pension reforms; when I first started it was a lonely place (as you can see from the comments section). However I think that the thing that worries me most is that I suspect that everyone can hear it ticking.
The most recent evidence of this was the FCA’s Dear CEO letter on the pension reforms. This latest move by the FCA seems a rather halfhearted attempt to put pressure (and potentially future blame) on the providers when the negative publicity arises. The FCA letter requires firms to ask questions of clients wanting to use pension freedom and then respond with appropriate risk warnings. At the same time the provider must not stray into the realms of advice, which reminds me of something from Dilbert.
The fact is that providers are going to be in an impossible position and so, in my view, will the pension guidance system. How for instance should it deal with a client determined to pay off his or her mortgage with their pension fund even when it makes no financial sense? Worse for me is that the application of the guidance isn’t balanced. For example a worker living a few miles from me in Glasgow Calton, where life expectancy is lower than the Gaza strip, in a final salary scheme at 65 won’t get any guidance other than “take your final salary pension”. Surely that worker deserves the guidance and advice of considering the possibility of switching out to a money purchase scheme and drawing down the money given their low likelihood of living very long.
My fear is that a mis-selling scandal of some description is inevitable from these reforms. I say inevitable because out of these reforms we are going to see winners and losers. The winners will be ignored but the losers will be paraded by the media as victims looking for someone to blame.
The recent actions of the regulator just seems more to be a Pontius Pilate hand washing exercise whereas surely it would be better that they took a more definitive, but politically unpopular, stance to enforce risk warnings about taking pension benefits. They have done so in the past with precipice bonds and their deliberately unappetisingly named SCARPs regulations. Unfortunately the FSA at the time acted on SCARPs after the horse had well and truly bolted. I do hope that the FCA learns the lessons of the predecessor and locks the door whilst the horse is still in the stable.