Make sure your pension decisions are on the money with the right advice
What you do with your cash will have an effect on your future in retirement – and regulators could do more,
There’s always a good reason to buy chocolate. Confectioners have hijacked our celebratory moments throughout the year and seamlessly market their wares linked to the annual cycle of special days and holidays.
When our children were young they used to receive a huge amount of chocolate at Easter, and the dilemma was to decide what to do with it. If it was left up to them there is no doubt that they would eat until they could eat no more.
As sensible parents, we used to ration what they could have and allowed a little every day after a meal to make it last. This is what UK pensions legislation used to do. Pension savers had little choice over what to do with their savings, and they certainly couldn’t spend it all at once.
Now, thanks to the new pension freedoms, we can have as much of our money as we like, as quickly as we like. The Financial Conduct Authority could do more to ensure consumers are not bamboozled by the advice they receive when choosing what to do with their pension pot, especially if faced with the option of transferring out of a final salary, or defined benefits, scheme.
Giving people more opportunity to decide on how to manage their money into retirement is a good thing, but those who are not well advised and make poor choices could end up reliant on the state, and that won’t be good for anyone.
The recent events involving thousands of steelworkers who may have lost out as a result of transferring out of their final salary pensions is proof that more support and protection is required.
Introducing financial education at a young age would be a first step.
Financially astute school leavers will be in a far better position to manage their money if they have some knowledge of how the systems work and the options that are open to them. However, this doesn’t help those facing retirement in the next few years who are placing their trust in the financial planners to give them the right advice.
It is already essential to seek regulated specialist financial advice when transferring out of a final salary scheme where the cash equivalent transfer value is £30,000 or more.
So what more could the watchdog do to protect people faced with often perplexing information about what turn out to be a life changing decision?
Firstly, a consultation has been launched in response to the call from politicians to introduce a ban on contingent charging. Depending on the outcome, this would mean that advisers would be paid for the advice they give, and not paid only if their advice is acted upon, removing any temptation to more actively promote the course of action that results in a fee.
Secondly, cash flow modelling of stay or transfer scenarios should be compulsory. Setting out a full picture of a person’s financial situation helps them to visualise the lifestyle they can expect to afford when they retire.
It goes beyond simply managing investments and takes into account growth, inflation and tax rate estimates. Taking this detail combined with advice from a well-qualified and experienced financial planner will provide a far clearer understanding of the consequences of decisions made. Equally, it should be compulsory that all modelling and if appropriate, subsequent recommendations, are illustrated based on appropriate growth rates which are linked to the individual’s attitude to risk.
Finally, there should be a ban on employers sponsoring advice for their employees who might be con- sidering transferring their pension pot into a defined contribution, or private pension, scheme.
Generally it is not in a person’s interests to transfer out of a final salary scheme as it usually requires giving up secure benefits in favour of a riskcould
ier investment. However, it can be in an employer’s interests to reduce the number of members of its pension scheme.
Everyone has a right to take control over their retirement plans, and the new pension freedoms allow for that. However, as a financial planner I, for one, would welcome these regulatory changes to give pension savers confidence that the advice they are receiving is right for them. Barry Davidson, head of financial planning at Thorntons Investments.