The pension freedoms have left the advice industry in a bit of a dilemma when it comes to advising clients on pension encashment, says Chris Gilchrist.
The initial political spin on the pension reforms did focus on cashing in your pension to buy a flash motor. So it’s not surprising that a large number of people have decided to take the opportunity to spend their money.
Like other advisers, we have no problem with that. As the pensions minister Steve Webb said, people should be treated as grown-ups and left to make their own choices. But we do have an issue with being left holding the Queen of Spades. And it seems to us that regardless of how vigorously we express to a client our view that they should not encash their pension, if we do then act for them and help them to cash in, there is a possibility that they or one of their inheritors will later complain.
Of course, we would expect the documentation of our advice to be excellent and any such case to be defendable at FOS. But why should we want to take on business with a high risk of a vast amount of time wasted in defending a case when we will only earn a modest fee for the advice?
Bear in mind that, like most advisers, we only really make a profit from our clients over the long term. Our initial fee makes a modest profit but you wouldn’t want to run a business that just generated initial advice fees. The real value of the client is the ongoing service revenue, and that is what our business and service propositions are built on.
“The conclusion we have drawn is that we should deter people who are not already clients from asking us to act for them or advise them on pension encashment.”
So one-off transactional business is in itself not very appealing, and if it carries higher than average risk of a complaint, it becomes very unappealing.
The conclusion we have drawn is that we should deter people who are not already clients from asking us to act for them or advise them on pension encashment. To do this we have adopted the simple expedient of asking for high initial fees that have so far successfully deterred would-be pension cashers. If any of them actually said they were prepared to pay the fee, we would ask for payment up front.
For existing clients, everything is different. Firstly, we know them, usually having acted for them for many years. So we will be able to validate the advice to encash. Secondly, such clients will usually hold substantial other assets, making it less likely that pension encashment poses any serious risk to their financial wellbeing. And thirdly, we are earning an annual service fee that justifies giving them advice where there may be an element of risk for us. So in this case we have no problem about assisting clients to encash.
We do not understand how a regulator can permit the situation where an individual can instruct a provider to encash their pension and the provider can escape liability, yet advisers could be left with a liability if they advise against encashment but assist in its execution. This is certain to disadvantage consumers. But until the regulator levels the playing field, we will refuse to play.