A chance to rebuild the ethical face of advice
By raising its game around pensions freedoms, the financial advice industry can win itself much needed consumer confidence, says Andrew Pennie, marketing director, Intelligent Pensions
As advisers, we are all likely to have at least one client who wants to fully cash in their pension following the launch of the new pension freedoms. We have actually had three clients contact us with such a request and as a result of our discussions, only one is continuing on the full cash-in path, and despite our recommendation not to do so.
Following the Tory majority in the General Election, we are now unlikely to see any challenge or watering down of the pension freedoms and with all systems go, advisers must be prepared to tackle clients looking to cash in their pensions for all the wrong reasons.
Clearly, there can be some very good reasons to cash in a pension, whether in one go or a short series of large payments, but there are also a large number of poor or misguided reasons to cash in a pension. Advisers are well placed, and have an obligation to our clients, to challenge their poor and misguided decisions and we are certainly better placed to do so than an unqualified customer services operator who has a list of questions but an inability to engage in any meaningful way.
We are all aware of the increasing number of scams targeting those with pension savings and equally, we know that ‘pensions’ are not held in the highest regard by the general public. As such, we need to help clients avoid the scammers and avoid scamming themselves!
The amount of tax payable when cashing in a pension is clearly underestimated by many and simply making clients aware of the total tax bill will often act as a sufficient ‘light bulb’ moment for the client to see the error of their ways, particularly where it pushes the client into a higher tax bracket or compromises their personal tax allowance. Where it becomes more tricky is where clients perceive investing in buy-to-let or holding the money in a bank account, or even under the bed, is more beneficial than leaving the money invested in their pension. We have a long-standing similar experience in that we always challenge our clients about taking their full pension commencement lump sum (PCLS) if they have no genuine need for it. Clients naturally assume taking the PCLS is a good thing but with the right conversation and engagement, they can quickly see the advantages of not doing so – and generally then don’t.
We would encourage advisers to be proactive with client cash-in requests. Our experience so far shows we have saved two thirds of our clients by doing so! I would also recommend advisers document their involvement in such cases whether it be by phone, email or meeting. Even better, write to your clients summarising any discussions and what you believe they should do. If you have made a recommendation not to cash-in and your client still wants to cash in, I strongly suggest you get them to confirm in their own writing the action they wish to take and why they wish to take it.
The last thing advisers can afford to do is become ‘order takers’ for people wishing to cash in their pension. We must challenge our clients and ensure they fully understand the implications of their actions. Pensions and retirement planning are complex – mistakes are easily made, often expensive and usually irreversible. As an industry, we are well placed to benefit from the pension freedoms but to become the ‘go to’ source for retirement advice, we need to raise our game, save our clients from misguided decisions and only then can we hope to rebuild the much needed consumer confidence in our industry.