Keep your pension pot safe from the vultures

PENSIONS should be a rock-solid way to invest for the future given that pretty much every single one of us will rely on them to fund our final years, so why have they been such a disaster zone?

The last four decades have seen one pensions scandal after another, robbing savers of their wealth and destroying their retirement.

Today’s savers face a string of threats from online scammers, commission-hungry advisers, over-charging pension providers and greedy company directors.

All you can do is try to avoid falling victim. It is not easy, though.

SCANDAL

In the late 1980s and early 1990s, two million fell victim to the pensions mis-selling scandal, when greedy salesmen advised members of defined benefit final salary workplace schemes to switch into riskier personal pensions, and gobbled up commission on the deal.

This was quickly followed by the mis-selling of pension top-ups known as freestanding additional voluntary contributions, or FSAVCS.

The pensions hall of shame includes Equitable Life, Robert Maxwell, Sir Philip Green and even Gordon Brown, whose 1997 pensions stealth tax has cost savers more than £100billion. Now the latest pensions scandal echoes the very first one, as advisers pocket fat fees by encouraging defined benefit pension scheme members to transfer out.

Once again, the regulatory authorities have acted far too late.

SHAMELESS

In February 2018, the Work and Pensions Select Committee warned that “dubious” advisers had “shamelessly bamboozled” thousands of British Steel Pension Scheme members into switching to costly, high-risk funds.

The advisers were paid through “contingent charging”, where they only earn a fee if a client agreed to transfer a defined benefit pension, giving them a clear incentive to recommend just that. MPS called for a ban.

Yet in May 2018 the Financial Conductauthority (FCA) refused to ban contingent charging, saying it wanted to collect more evidence, despite admitting a clear conflict of interest and saying most transfers were unlikely to be in people’s best interests.

It finally banned the practice last October, after hundreds of thousands had been advised to transfer pensions worth tens of billions.

INCENTIVE

The scandal was as inevitable as it was avoidable.as pensions campaigner Ros Altmann explains: “Contingent charging means the adviser only earns a fee if the transfer goes ahead. Unsurprisingly, the majority of their customers were advised to transfer.”

While some will benefit from transferring, many will be worse off.

Last week, the FCA released data on defined benefit pension transfers from 2018 to March 2020, which showed the majority of advice firms used a contingent charging fee structure. Some may have told clients to move out of pensions offering highly attractive guarantees unavailable elsewhere, when it was totally unsuitable to do so.

Altmann said: “If an adviser only earns money by telling people to transfer out of their final salary scheme, they will have a very strong incentive to come to that conclusion.”

COSTLY MOVE

Huge sums were at stake, with latest FCA figures showing the average transfer value since 2018 is an incredible £336,496.

Those advised to transfer out typically had bigger pots, averaging £405,178 against £267,814 for those advised not to transfer.

To make matters worse, almost one in 10 firms did not have professional indemnity insurance, while 28 per cent had only limited cover.

Altmann said this means customers who have been wrongly advised may find they have no recourse to compensation, especially if the advisory firm goes out of business.

She said good advisers are professionals who spend years developing their skills: “They should charge for their advice, without being biased to any outcome.”

Many savers will be reluctant to pay a fee, but that is no disaster. “The worst that happens is that they do not transfer, which is a lower risk outcome,” Altmann said.

While most advisers are honest, too many are still driven by fees, and they are still out there

STAY ALERT

There are cases where final salary pension transfers can be justified, especially for those in poor health, or who are single or only have a small pension entitlement.

For example, some defined benefit schemes paying just £20 a week may have a cash-in value of £40,000.

These people need fair advice, with no financial bias. In most cases, the best decision is to stay put.

While most advisers are honest, too many are still driven by fees, and they are still out there. Tom Selby, senior analyst at AJ Bell, noted: “FCA figures show that 3,427 British Steel members were advised to transfer out of their defined benefit scheme by firms currently active in the market.”

Pension transfers are now shrinking, but savers must remain alert.the next mis-selling scheme will not be far off.