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Topics: Scottish Life International| Axa Winterthur
Advisers could face regulatory repercussions if they fail to warn their income drawdown clients about the potential pitfalls of taking their tax free cash early.
Pension providers say there is a growing trend for consumers to take their pension commencement lump sum (PCLS) - commonly known as tax-free cash- earlier than ever before.
But they are concerned some advisers are selling income drawdown purely on the basis of early access to tax-free cash without properly explaining the pitfalls. Client can currently access the cash at age 50 but this will be increased to 55 in April 2010.
Since A-day, pension income options have become increasingly flexible, with large numbers of consumers now using income drawdown as a way of accessing their PCLS well before retirement, without taking an income until many years later.
However, the FSA has yet to provide specific guidance over what advisers should consider when approaching customers who want to access the PCLS ahead of retirement. Advisers are being urged to fully document their recommendation process in these instances to ensure they protect themselves.
Fiona Tait, business development manager at Scottish Life, says the FSA is likely to update its guidance in the future, and could even launch a thematic review as the practice becomes increasingly popular.
"About three quarters of our income drawdown clients are taking no income, and are presumably using it to access their PCLS while they are still working," she says.
Current FSA guidance on income drawdown assumes clients are using the product to take an income, as well as accessing their tax-free cash, but consumer trends have changed significantly since 2006.
"The pensions switching review was definitely a step in the right direction, but further guidance on how to advise a customer who wants to access their tax-free cash without taking income would help," Tait adds.
Mike Morrison, head of pensions development at AXA Winterthur, says advisers should remind clients of the effect that taking the PCLS will have on the potential future growth of their pension pot and as a result, their final income. Clients should be encouraged to continue making contributions after taking the PCLS, he adds.
"In the credit crunch, there is a good chance some people might take the tax-free cash to tide them over if they get made redundant, but not resuming pension payments when they
get back to work could create problems in the future," he adds.
Tait and Morrison say it is vital advisers give these warning to clients and document then to protect themselves should the FSA start reviewing the practice.
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| Comment | Advisers warned on income drawdown misselling |
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Fed up with hindsight reviews
and having been fortunate enough NOT to get caight up in any personally, we took the unusual action of deciding to record ALL client contact (meetings and phone calle) as MP3 or wav.sound files so we have the recording of the full discussion with clients about the implications of taking their PCLS early AND more importantly the relative priority THEY and not the dictators/oligarchs at the FSA seem to want to place on it. If a client has borriwng being charged at in excess of say 15%, then they would be a n iddiot NOT to consider using PCLS to reduce it if they can. They need to know they MIGHT be an idiot to do it if they have health issues and are not married as the residual fund would potentially be liable for IHT and also as they would be deemed to have a nominal income even if only the PCLS were drawn and not income, it could open the "pandoras box" as we describe it to clients which could affect entitlement to benefits as well as allow creditors to get access to the income. Make sure you have an accurate record of the discussuon with the client, but don't let the threats from the FSA influence what YOU think is right for the client as after all, we are supposed to be Independant.
Posted by: Phil Castle
Look out!!!!
And while we're warning our clients that early access of their PCLS might effect future growth and the level of future pension income, we might take the opportunity to remind them to always look both ways before crossing the road. Come to think of it, maybe I should remove all the sharp knives and matches from my clients' homes before leaving...or maybe the majority of my clients would look at me askance if I was to offer such patronising advice? So these warnings had better go in the small print with all the rest of the CYA caveats
Posted by: Tufty
Why not?
Am I missing something here? Surely if you take 25% now then it will make absolutely no difference to the final fund available to buy your pension. It is still 75% of the initial amount now or later! Say for example your fund is £100,000 and it doubles in size between today and your eventual retirement (we hope!!!). No TFC now and the fund is £200K from which you take £50K TFC leaving £150,000 to buy the annuity. TFC now = £25,000 and the fund at retirement is £150,000 (£75K x 2) The essence here is what is the purpose for any tax free lump sum right now and (bearing in mind the 35% potential tax on death) - can you make (or save) more by investing out with the pension or repaying debt. There is of course also the potential for TFC to be stopped any time in the future so yet another reason for taking it now! Finally with many people losing work - pension TFC could be a valuable potential option for start-up business funding in the right circumstances.
Posted by: Graeme Mitchell
Better out than in
Graeme Mitchell is right, often (obvioulsy depending on the size) tax free cash is better invested outside a pension than in it. There is far too much state control over pension investments. Why leave cash stuck in an investment called "pension"? Advisers should document reasons for leaving it exposed to state control!
Posted by: Ken Durkin
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Drawdown misselling
Well what would they FSA know about drawdown? Nothing really except that IFAs should already put their checks and balances in place before recommendations without the FSA threats. Who have the FSA got to regulate now as mostly I think bad advisers have dissappeared along with good ones to follow.
Posted by: Exposing the FSA mistake team