IFEs not IFAs

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If you’ve followed my posts over the past few days, you’ll l know I’ve referred to a debate between advisers, insurers, pension managers and trustees which started out discussing the ethics of incentivizing  enhanced transfer values and has moved toi discussing how and when advice can be offered to those leaving the workplace for “the longest holiday of their lives”.

Margaret Snowdon who is a boss of one of our largest buy-out insurers has posted:-

Advisers do not want to advise on PIE, which is a big decision for a pensioner, but it is not regulated activity, just like taking a tax-free lump sum is not regulated.

While on my soap box, I think practical help and guidance to members is as valuable as financial advice, but because of fear of accidentally stepping over into regulated advice, most responsible figures ( administrators for example) keep well away, so members have no one to turn to. This is the real shame.

Craig  Wooton, an actuary with Punter Southall responds:-

I would echo Margaret’s words that, in my experience, IFAs have usually not wanted to touch Pension Increase Exchange exercises so the pensioner is left very much with a (difficult) decision to make themselves.

The point of agreement here is that financial advice is geared towards a definitive solution. One definition for advice is “a discussion that leads to the provision of a definitive outcome”. Theoretically the definitive solution or outcome might be “do nothing” or “keep on keeping on” or as in Pension Increase Exchanges (PIE) “continue to draw your occupational pension but chose a different shape to the income increases”.

Margaret’s post incidentally touches on one of the most sensitive (and least discussed) decisions members of occupational pension schemes can take – whether and how to take the tax-free cash instead of additional pension from the scheme.

I guess if I asked you whether you’d like £100,000 in cash (tax -free) or £5000 a year for life (taxed), increasing in line with prices with a continuing pension to your spouse at £2,500pa, you’d chose the tax-free cash. It’s unlike;ly, even if you were taking the decision at 65 rather than 60 that you’d get that quality of pension for £100k but the “tax-free” bit would probably swing it (if not the right to spend your cash as you like).

 But suppose you had £100,000 built up in a DC pot from the additional voluntary contributions you’d paid into the scheme. Do you know that the trustees can give you the choice of taking the excellent offer of the scheme pension and use the money in your AVCs to pay you your cash?

For you to take an informed decision on whether to take the cash at all or take the cash from your AVC or by shrinking your scheme pension depends on a whole load of issues, including your tax status in retirement, your state of health (and life expectancy) and the generosity of the trustees in the commutation factors (the rate of exchange from pensions to cash).

What’s need here is not a financial adviser telling you what product to buy but financial education that enables you to take the right decisions based on proper information. That information will need to be based on a proper medical assessment of your health, an appraisal of the commutation factors from someone (probably an actuary) capable of working out if you’re getting fair value and a proper assessment of your and your spouse or partners tax rate as and after you leave work.

The good news is that these decision van be taken on facts not assumptions, they do not depend on you guessing what the return will be on your investments or what annuity rates will be in the future. In other words, it is possible for you to take objective “at retirement” decisions providing the financial education is of the requisite quality and is of course objective (eg independent).

The other bit of good news came later in the comments thread from Peter Flanagan, the pensions manager of one of our fine old defined benefit schemes that Frank Field once dubbed “our economic miracle”;-

We have a Pensions Increase Exchange exercise on the go and although we found it tough we have found a first class adviser for members. The first stage of query is often best dealt with by pensions administrators as there is a lot of explaining the current benefit to be done. Then an IFA is paid for by the Trustee for any member who wishes to consider the offer further. The adviser will look at a wide range of factors including health and life aspirations but some pensioners are willing to give up some value of pension in their old age for more pension now when they are able to enjoy it.

I cannot say how pleased I was to read that. As I have followed this debate I have become convinced that we need to build on the advisory capacity that Peter refers to . It may be that we have to use a term like financial education to differentiate this kind of advice from the old “product orientated” advice that has characterised our image of IFAs over the past twenty five years. If, as Craig implies, traditional advisers will not take up this kind of work, then let us hope that we will find those with the right skills, actuaries like Craig and Alan Higham  who will be able to train a fresh group of committed people whose job will be to do this kind of work.

I am 50 this year and at some time over the next twenty years will be taking my decisions. It may be that like me, you are in the fortunate position to have legacy or even actively accruing DB benefits in which case you’ll be thinking as I do that help is needed! Even if the only benefits you build up are through DC, you still need that help and the sooner we get on with building the capacity to deal with our issues the better.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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