In its early days, ministers were famously relaxed about how savers would use pension freedoms when they were launched in April 2015.
Holidays, sports cars, fine wine – savers are adults.
Since then, the UK’s Financial Conduct Authority has become concerned about several aspects of what people are doing with the cash.
First and foremost the regulator believes too many people are incorrectly cashing in – prompting fears of a huge mis-selling scandal in the making.
With longer lives, those big sustained payments over an individual’s life time disappear and instead a big pile of cash can be frittered or, probably worse, languish unspent and uninvested.
In order to protect savers from cashing in and missing out on those regular payments, the rules dictate that transfers of pots over £30,000 ($39,736, €33,955) must be advised.
Fewer advisers and higher costs
The number of pensioners being mis-advised and mis-sold saw the FCA step in and attempt to do some damage control, with regulatory intervention seeing some firms ‘voluntarily’ giving up permissions to conduct pension transfers.
Another consequence has been a sharp rise in the cost of professional indemnity insurance for IFAs.
The effects of higher PI have been a reduction in competition by driving participants out and increasing the cost of carrying out transfers for the survivors.
Fees versus percentages
In a recent series of letters submitted to newspaper The Sunday Times, three individuals wrote about their experiences with pension transfers.
One described them self as “incandescent with rage” about having to pay £150 an hour for the advice of an IFA they didn’t trust “in order to access my own money”.
Another complained about the £4,000 charge for transferring a £34,000 pension pot. “I think the financial adviser fees are out of proportion to the value of the fund,” the writer added that they “hadn’t taken” their pension.
A third letter said that “we didn’t need advice really as we both have a financial background”.
A fourth letter, however, said that paying 1% on pension pots worth more than £1m was “money well spent”.
The result is that a pension in the low £30,000s is much less attractive to cash in if the fee is £4,000, compared to £10,000 paid on £1m.
Freedoms for all?
All of this begs the question, who are the pension freedoms actually for if transferring smaller pots is viewed as risky by advisers and expensive by clients?
Wealthier individuals, perhaps with multiple small pension pots, who might want to rationalise their savings and have a bundle to spend on holidays and grandchildren.
People with a few smaller pots that are just over the £30,000 threshold, however, seem to be thinking twice.
Unfortunately, this pensions freedoms idyll looks further out of reach because small pots are seen as risky and expensive to handle as someone recklessly cashing in their entire life savings and therein lies the potential problem.
