Pension freedoms to be 'open season' for fraudsters

jamesd

bmm78 wrote: »

Should a consumer be moving into drawdown by default without making an "active choice"?

Yes. It's the loest risk choice for the consumer, far better than doing something like an irrevocable purchase of an annuity that would pay less than deferring the state pension without even trying to allow for medial conditions that could allow an enhanced annuity to be purchased.

bmm78 wrote: »

What does a "default" drawdown product look like, and what does it assume that the consumer will do (eg what level of withdrawal, does it assume annuitisation at a later date)?

No immediate withdrawing and investment time horizon over five years.

bmm78 wrote: »

How does a default drawdown product interact with accumulation defaults such as lifestyling?

If the customer proves that lifestyling to switch to annuity-mathhcing options was wrong by not buying an annuity then at least some of the lifestyling needs to be undone over a suitable time period. If the money is in a default balanced managed fund then moving back to that would seem like the way to go.

Lifestyling itself without knowledge of the plans of the consumer is a dubious idea that exacts a high penalty in growth if the consumer turns out not to buy an annuity.

bmm78 wrote: »

How feasible is it do develop a product default that manages risk & volatility, has low charges, and is aimed at a typical fund size of £36,000?

If the pot is in default balanced managed that tends to answer the question well enough when the consumer is choosing not to take income yet.

The pension provider would, I hope, make use of the DWP's forwarding service to try to contact their customer if there is no positive response indicating contact success.

jamesd

cepheus wrote: »

The present rules mean you could blow the lot then rely on the state to fund your bills. Surely that can't be too popular with this forum?

So do the new rules, but for larger amounts of money.

So far as popularity with me rather then the whole forum goes, I know the average pot size so I know that the impact is not likely to be huge. £1440 a year assuming 4% income in drawdown on a £36k pot. But if the money is being spent it'll save the 10.4% or 5.8% that would be paid instead if the money was used to fund state pension deferring.

Though of course the people who have larger amounts are less likely to blow the lot because they are the ones who are likely to have taken an interest and feel a sense of ownership and control of their futures.

Relying on the state is an interesting concept but a lot of people will have household incomes too high to do that anyway, so blowing the money just harms them.

cepheus

bmm78 wrote: »

Fraud committed by people outside of regulated financial services is not a financial services "mis-selling" issue, particularly when the potential for that fraud is fuelled by reckless policy making, and it is people within the industry who have been the most vocal and pro-active in trying to prevent it.

I see it as less of a black and white issue, but shades of grey, such as the differences between basic tax planning, avoidance and tax evasion. If there is a profit motive, particularly one which is exacerbated via commissions there is greater potential for unethical practices.

kidmugsy

cepheus wrote: »

the differences between basic tax planning, avoidance and tax evasion.

I do basic tax planning
You do avoidance
She does evasion.

PennyForThem_2

Australia reverting?


http://www.thisismoney.co.uk/money/pensions/article-2696204/Australian-government-considers-copying-UKs-pension-system.html


http://www.moneymarketing.co.uk/news-and-analysis/pensions/lessons-from-down-under-on-pension-freedoms/2017918.article


I got told about this by my IFA who is quite worried/concerned that UK also go down this route.

bmm78

Having read the Which? report in more detail, I think the proposals are more reasonable than they have perhaps been portrayed in news reports.

The main concern seems to be that the existing framework does leave it open for providers to exploit the inertia of existing customers by moving them into uncompetitive drawdown contracts, in much the same way as they did (or do) uncompetitive annuities.

In the interests of being pro-active and preventing issues before they grow, it does make sense to look closely at this area and see what can be done without restricting innovation and product development. The report does actually make it clear that if people want to pay above any cap for a specific fund, they should be fully entitled to do so.

jamesd wrote: »

Yes. It's the loest risk choice for the consumer, far better than doing something like an irrevocable purchase of an annuity that would pay less than deferring the state pension without even trying to allow for medial conditions that could allow an enhanced annuity to be purchased.

Agreed on the annuity side of things. Hopefully, the 2nd Line of Defence rules and the further rules due to come into place later in the year should mean that the vast majority of annuity purchases are active decisions based on a sound understanding.

Regulation needs to be really strong in this area, far more so than it has previously. Even since the budget, internal annuity sales have been surprisingly resilient.

With regards to drawdown being the default, there is still the issue of the regulatory stance on drawdown being a "complex" and "high-risk" product. Even as recently as a couple of months ago the regulator stated that drawdown was unlikely to be suitable for funds less than £50,000. While that is certainly a debatable point, it does highlight the discrepancy between the way the market is evolving and how the regulator perceives it. Is it possible to default the typical £36,000 fund into a product that the regulator considers to be probably unsuitable?

There is also the issue of how the FCA views a provider moving a client into drawdown. There are rumours that they will view this as being an advised sale http://www.corporate-adviser.com/news-and-analysis/latest-news/providers-on-hook-for-advice-for-dc-to-dc-transfers/2018643.article

jamesd wrote: »

If the customer proves that lifestyling to switch to annuity-mathhcing options was wrong by not buying an annuity then at least some of the lifestyling needs to be undone over a suitable time period. If the money is in a default balanced managed fund then moving back to that would seem like the way to go.

Lifestyling itself without knowledge of the plans of the consumer is a dubious idea that exacts a high penalty in growth if the consumer turns out not to buy an annuity.

One of the problems is that it is very difficult to predict how popular or otherwise guaranteed income products will be. Even with the tarnished reputation of annuities, according to ABI stats they are still sold in far greater volume than drawdown products (28,712 to 11,454 last quarter).

The existing accumulation model was built up to fit in with the restricted decumulation options at the time. The need for lifestyling is certainly questionable, but it could be a huge task to unravel it. I don't have any stats at hand, but from previous experience working with GPPs the majority of people just accepted the default lifestyling option, probably without much thought.

jamesd wrote: »

If the pot is in default balanced managed that tends to answer the question well enough when the consumer is choosing not to take income yet.

I would have reservations about defaulting people into a fund with (eg) 50% equity content at that stage in their life, without any knowledge of their investment experience, appetite for risk and capacity for loss. Not all of the £36,000 pension pot crowd fit into this description, but a lot of them are very risk averse with a low level of financial knowledge, and little means to absorb any investment falls.

jamesd wrote: »

The pension provider would, I hope, make use of the DWP's forwarding service to try to contact their customer if there is no positive response indicating contact success.

There is no reason, particularly with free access to Pension Wise, that the majority of people shouldn't be making active decisions. I think the best resolution to the defaulting issue is to keep the number of people not making an active decision to as low a figure as possible.

nearlyrich

I think the media like to whip up a frenzy, anyone who has really thought about their financial future will not jeopardise it by making crazy decisions and if like me they have built up a reasonable pot they will be better off deciding for themselves what to do with their funds than taking the least worst option from the market. I am looking forward to spending what I have amassed over my lifetime of work on my hopefully early and long retirement and I don't plan on giving the treasury much of the proceeds over and above VAT on my spending.

jamesd

So far as drawdown goes, the reasons of the regulator matter. For a financial adviser a problem with drawdown may be charges at the £50,000 level, not product suitability. Cash and money market funds to provide income during state pension deferral seems like a lower risk product combination than annuity purchase, partly because it eliminates the potential for an FSCS 10% income loss. It'll be interesting to see whether any providers choose to package this up as a product to compete with annuities.

Interesting that the FCA appears to think that it is appropriate to use regulatory fiat to prevent customers from using a change in the law that clearly envisions a guidance guarantee, not mandatory advice. I wonder what the FCA's complaints procedure for complaints by consumers against the FCA is?

I think that you're still right about GPP choices. Even the people who ask questions here are a pretty select group compared to the population as a whole. When it comes to risk aversion I think that a lot of that is lack of education more than inability to accept volatility. Ask someone if they can handle a 40% loss can get a different answer than asking them if they can accept a 40% drop on a roller-coaster in reverse that'll end up higher by the end (given sufficient investment horizon). And that answer may change in the time period we're dealing with here, where that time horizon may be a lot shorter.

Yet when it comes to balanced managed at a magic age, what changes at that magic age if the customer isn't communicating? Not a lot fundamentally, but given the implications of state pension age and planning and possible actions I am sympathetic to moves to do quite a lot of derisking based on market conditions a year or two out from then. At least the provider can hope that that magic number and government communication or realisation that it's really happening might prompt action by the customer. If still no contact, though, I'd personally go to an assumption that it's being kept as a long term contingency or inheritance pot.

redux

I've read that HMRC have issued instructions that people making a significant one-off withdrawal should be taxed as if that would be their monthly income for the rest of the year.

Thus people who would be basic rate taxpayers might temporarily be taxed at 35% or so, and have to wait to claim some back later.

It seems to me that much of the flak flying around as a result of these changes will be about money-grabbing ........, but they might not be talking about fraudsters.

greenglide

But what you are talking about, taxing a single payment to a person who you don't hold a tax code for using a week / month 1 tax code is perfectly correct and normal.

How else could it reasonably be done within our existing tax system?