30th May 2014
As the financial landscape shifts to give consumers greater control over their savings and auto-enrol workers into pensions, there are concerns that new problems and mis-selling scandals waiting in the wings.
While the introduction of auto-enrolment and the changes made in the Budget to relax the pension drawdown rules and rid retirees of the need to buy a poor value annuity are to be welcomed, the decisions that now face savers and retirees could bring a new wave of confusion.
The regulator and ombudsman have already flagged areas that could be ripe for complaints, so consumers should arm themselves with information and advice to make sure they do not fall foul of changes to the rules.
If you’re not saving into a workplace pension at the moment the chances are you will be soon thanks to auto-enrolment, which will see nine million workers automatically placed into their employer’s pension scheme for the first time.
However, the Pensions Ombudsman has warned it expects to see a rise in complaints because of the increased number of people being placed into a pension. In its business plan for 2014-2017 it said it will see a steady increase in its workload.
‘With increased membership [of pension schemes] there will, in due course, be more potential for complaint,’ it said. ‘We expect our caseload to increase, though with a gradual and delayed effect.’
Workers being auto-enrolled into pension schemes should make sure they read all the documentation provided by their employer and be aware that even if you opt-out of the scheme, you will automatically be enrolled again in three years and expected to opt-out again.
You should also make sure you understand where you pension money is being invested and what the charges on the scheme are. Remember that investing is a gamble that can provide rewards but with the risk that if stockmarkets fall you will lose money.
The ombudsman said it will have to adapt its processes to deal with auto-enrolment complaints, to make it easy for everyone.
‘We will have to be able to provide a complaints service that fits comfortably with pension schemes that are easy to access, straightforward to invest in and which accommodate shorter term membership and employment patterns. Membership will be more diverse and have a broader range of needs and expectations,’ it said.
There is another pension change which the ombudsman is expecting to generate complaints; the Budget reforms.
The rules around how you can take your pension in retirement have been changed dramatically, allowing everyone to access the entire pension pot as a lump sum and negating the need for a retiree to buy an annuity.
‘There will be fewer complaints about delays in settling annuities,’ said the ombudsman. ‘But each individual drawdown transaction will be vulnerable to a complaint. And depending on arrangement for advice and information perhaps that too could be a source of complaint.’
With the changes to the rules there will be more people who will shun annuities and opt to go into drawdown, where the pension pot remains invested and an income taken each year, however there are inherent risks in investing that many may not be aware of and may be shocked if they lose money if stockmarkets fall. Pensioners wishing to access large sums from their pension should also remember there is a tax implication. Although you can take 25% of your pension pot tax-free, the rest is subject to a marginal rate of income tax.
Martin Wheatley, the chief executive of the City watchdog, the Financial Conduct Authority (FCA), has warned about the development of ‘simplified advice’.
Simplified advice is essentially a guided sale of a financial product to consumers. It is intended for those with straightforward needs and less money who do not want, or do not want to pay for, a full financial planning review.
These services will most likely be delivered online and use decision tress and filter down options to help people get to a product that is suitable. There are many people whom are expected to benefit from simplified advice as the cost of face-to-face financial advice is increasing.
The regulator has said that online services cannot lead to a raft of mis-selling and is interested in the quality of the services being offered and will produce guidance to firms wishing to offer this type of advice.
‘There will be guidance offering greater clarity to firms around the broad expectations for supplying limited or simplified advice. And there will be a question posed as to whether more sweeping change is required,’ said Wheatley.
‘This work shouldn’t be mistaken by firms as any kind of charter for either mis-selling or abdicating responsibility.’