Calls to keep contingent pricing fall on my deaf ears.
I champion the pension rights of those with low incomes and I champion the rights of those likely to get lower pensions (women). I don’t champion the right of financial advisers to unlock CETVs for people without the cash to pay an upfront fee. This may sound paternalistic, it isn’t. Tax free-cash is provided to help people with freedom and choice and a pension is a wage for life. The tax incentives that go with pensions (whether DB or DC) are granted on the understanding that a pension is not a general source of later retirement wealth.
We have chosen to make CETV’s available to people with funded pensions but on certain terms. Those terms include the requirement that people take advice on whether the transfer is in their interests. We agree that generally a CETV is not in someone’s best interest.
I think it would be good that everyone owned their own house, but I do not think that 100% mortgages should be people’s be right. I do think that there should be stamp duty and that people should take legal advice as part of conveyancing. That’s because we know what happens when you have a frictionless house finance market.
I think it would be nice if everyone had good cars, fridges, sofas and could choose between private and public education and healthcare. But most people can’t because they don’t have the money.
Most people do not have the money to play “freedom and choice” on all their pension, that’s why the cash commutation was always limited to c25% of the notional pot.
Now some advisers consider the right to have freedom and choice on all their DB pension rights should be enshrined by giving contingent fees tax-breaks that make them the equivalent of a 110% mortgage. Forget it!
What follows is a briefing note that I sent to senior politicians in the hope that we might get a ban -at least on the tax-breaks- for contingent fees , in this year’s Finance Bill. My timing was all wrong and this note to was no avail, amendments were guillotined before the note was read.
But my campaign doesn’t end there. Expect to hear a lot more from me on this.
Need for legislation to protect members of DB schemes from harmful advice
The FCA sampling suggests 53% of those advised to transfer out have had questionable or wrongful advice. They consider that advice is event driven – as in BSPS’ Time to Choose when steel men faced a transfer guillotine. But there is evidence of mass evacuation – £.2bn left Barclays DB scheme in 2017, £2.8bn left Lloyds, the final amount leaving BSPS may exceed £3bn. Transfers are now business as usual for the 2500 authorised IFAs, it’s a nationwide feeding frenzy.
Not only is the advice to transfer questionable, so’s the destination of the money. The FCA are equally uncomfortable about the Self Invested Personal Pensions (SIPPs) and with profits funds used to manage the emerging “wealth”.
Most of the advisers who recommend transfers, benefit from the management of the transferred money through discretionary fund management agreements within the SIPPS and from adviser charges paid by insurance companies running with-profits funds.
As if these conflicts weren’t enough, IFAs have now invented a system known as “contingent fees/charging” where they get paid from the transfers. So, members only have to pay an upfront fee if they don’t take up the advice to transfer. Unsurprisingly, most IFAs recommend transfers most of the time and their customers only feel the pain of “contingent fees” when they get to retirement.
This sloppy process means that IFAs can extract 1-2 or even 3% of a transfer value as a contingent fee to remove the money from the DB pension and then charge as much again every year to manage the funds. As the average transfer value from a DB scheme is £500,000, that means some advisers are routinely taking as much as £15,000 for a single piece of advice and a regular income running to thousands of pounds for doing very little.
What is worse, unlike honest upfront fees (which are paid out of taxed income and with VAT), contingent fees can be paid from the tax-exempt transfer value and (because of VAT exemptions on “intermediation” can be paid without incurring VAT). Inadvertently, HMRC is cross-subsidising malpractice.
In summary – there are three problems
- Advisers are conflicted – they stand to gain from the transfer and are disincentivised to say “no” to a CETV
- Advisers can use contingent fees which increase the conflict as an adviser’s fees using this kind of charging are painless (and tax-advantaged)
- Instead of charging a fixed price for a job, an adviser can fix the contingent-fee as a percentage of fund- giving scope for absurdly high fees which often go unquestioned
I call upon all political parties to stop this transfer frenzy, by
- Putting an end to the practice of charging contingent fees
- Requiring separation from the advice to transfer and ongoing advice by requiring an adviser can do one or another (but not both)
- Capping the fees charge for advice on transfer at £5,000
- Ensuring that transfer advice is liable to VAT (and not paid for from a tax-exempt pension fund)
This misses the real problem why are so many members waking up to the reality that the lifetime promise of DB turns out to have been a lie
Advisers would not be troubled by very worried individuals but, as with British Steel, they realise that the counterparty to the promise and their advisers had failed them by doing a deal to renege on the promise
Compensation is avoided by passing mistakes onto other customers with stronger balance sheets in a train wreck the last man standing model doomed to fail
£trillions of unfunded liabilities have been Identified yet ignored.
It is bad enough watching one lemming jump over an economic cliff yet I see articles recommending that by grouping together holding hands the jump will miraculously produce a better outcome
Faced with the reality that DB has failed the poor I suppose the only option is to rabble rouse and divert attention from the establishment feeding off the cadaver of DB
Every single persons situation is different in terms of retirement planning.
I am an IFA and have said ‘no’ to many more pension transfers than ‘yes’.
Fees do not go ‘unquestioned’ by clients, people are not dumb, they want to know what they are paying for and want value for money.
Requiring separation from the advice to transfer and ongoing advice by requiring an adviser can do one or another (but not both)’ – No decent Adviser would advise on a transfer out then not be involved in the ongoing advice to the client, as part of the advice to transfer process a cash flow forecast taking into account how much can be sustainably withdrawn from the fund should be provided. This makes the client aware that they could run out of money if they don’t stick with a plan to withdraw a sustainable income. To separate this would cause Advisers to abandon clients with their CETV, giving a much worse outcome.
The problem is not taking the CETV, but finding reliable honest advisers who do not charge ridiculous upfront and ongoing fees, that invest in underperforming DFM’s for their own gain and then also charge exit penalties etc.
Lisa these negative attacks on IFAs show a lack of understanding that an SJP or restricted adviser is not a fully independent IFA. I have challenged Henry before to stop imagining that his experience in the 80s of clip board Barclay Walbrook, Levit types standing in Oxford Street flogging capital units to the uneducated is not the model of today.
While DB advisers struggle to recover VAT for large DB scheme pundits think it smart to damage all funds with irrecoverable VAT to the benefit of HMRC and the detriment of all pension beneficiaries, all to score some cheap point. Or, more synically, to prevent the victims of DB from affording advice
I don’t welcome DB advice work
If the DB schemes worked I would be the first to rejoice but when the individual member is left with the entrails of failed actuarial alchemy someone has to rescue the situation despite the low reward and commercial risk