Pension freedoms to be 'open season' for fraudsters

bmm78

jamesd wrote: »

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.

I think the pro-annuity / anti-drawdown stance has been embedded into the regulator's psyche for some time. It is like they have read a CII textbook with the standard drawdown memes of high charges, mortality drag etc, and never stopped to consider the effect of falling charges and annuity rates on the overall decision. Or indeed that the purpose of drawdown may not necessarily be to produce a better long-term income than that available via an annuity.

The FOS approach to drawdown sales has almost been to the point where an annuity would start off as the default option, and that a much higher burden of proof would apply to drawdown recommendations. Upheld annuity advice complaints are very rare, whereas drawdown cases are much more open to redress awards.

When the FSA reviewed the drawdown market (2011 IIRC), they found that the majority of files were either unclear or unsuitable. Even accepting that there were some reasonable points picked up in the review, it shouldn't be that difficult to justify drawdown over an annuity. Or looked at another way, it shouldn't be that easy to justify annuity over drawdown.

The tide may be turning though. At their drawdown review sessions not too long ago, they were quoting £100k as the typical fund required for drawdown. Back in the day it was £250k. A few months ago, it had dropped to £50k (not sure where the analysis for this came from, or whether they just liked the sound of that figure).

All in all though, the regulator does seem at odds with the way the market is developing. On one hand this may be a good thing, as they are supposed to be politically independent. It does on the other hand threaten to undermine the concept of pension freedom, and people who want to use that freedom unhindered are probably right to be concerned about what the FCA rules will look like by the end of the year.

jamesd wrote: »

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?

http://www.fca.org.uk/about/operate/complaining-about-us

The FCA do have a complaints procedure, and I think there have been complaints by consumers about matters such as the MMR and its impact on affordability and stress-testing. I think it's very difficult to get anywhere with this process though, as the FCA has statutory powers to regulate, and any rules they put in place are in effect an exercise of this power, and will normally be subject to a consultation period before they come into effect where objections can be raised.

Thrugelmir

jamesd wrote: »

Yes. It's the loest risk choice for the consumer, far better than doing something like an irrevocable purchase of an annuity

With the forthcoming changes. Let's see what products become available. Ultimately the cost of administering the plans or annuities will have an impact on what's best for those with smaller pots.

jamesd

bmm78 wrote: »

The FOS approach to drawdown sales has almost been to the point where an annuity would start off as the default option, and that a much higher burden of proof would apply to drawdown recommendations. Upheld annuity advice complaints are very rare, whereas drawdown cases are much more open to redress awards.

I agree and it's rather interesting because I think that selling an annuity within a few years of SPA should be a mis-sale by default with proof that deferring a state pension would not be a higher paying choice required to override that. Because I know that proof will be hard to find. But the FCA doesn't regulate state pension deferral so they may be blind to it based on what they regulate rather than the whole market.

bmm78 wrote: »

Or looked at another way, it shouldn't be that easy to justify annuity over drawdown.

I think that around SPA it's going to be really hard to justify annuity sale rather than state pension deferral, particularly for those reaching SPA before April 2016 when the payout is 10.4%, less a bit for the up front income provision from a pot.

bmm78 wrote: »

The tide may be turning though. At their drawdown review sessions not too long ago, they were quoting £100k as the typical fund required for drawdown. Back in the day it was £250k. A few months ago, it had dropped to £50k (not sure where the analysis for this came from, or whether they just liked the sound of that figure).

I really hope so.

bmm78 wrote: »

All in all though, the regulator does seem at odds with the way the market is developing. On one hand this may be a good thing, as they are supposed to be politically independent. It does on the other hand threaten to undermine the concept of pension freedom, and people who want to use that freedom unhindered are probably right to be concerned about what the FCA rules will look like by the end of the year.

The pensions freedom announcements mentioned a particular survey. I completed that survey with a list of cases and reasons why the current pension rules forced me not to use a pension for many parts of retirement investing. The pension freedoms could almost be a case by case response to the feedback I gave. It'd be really nice if the regulator was keeping up with me, not just the law... You're right that I'm somewhat concerned about them.

Based on what I've seen so far I do at least like their list of pre-sale questions and information to be provided to consumers by product vendors.

bmm78 wrote: »

The FCA do have a complaints procedure, and I think there have been complaints by consumers about matters such as the MMR and its impact on affordability and stress-testing. I think it's very difficult to get anywhere with this process though, as the FCA has statutory powers to regulate, and any rules they put in place are in effect an exercise of this power, and will normally be subject to a consultation period before they come into effect where objections can be raised.

I agree that it's likely to be difficult. Still, thanks and it's worth both knowing and giving feedback in consultation.

I've already been "abused" by their interactions with providers, since I have an interest only mortgage, it's suitable for me (a few hundred percent of value in the various parts of my repayment strategy and income multiple now below one rather than a bit over it at the start) and I'd rather like them to be readily available in the future.