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Letter: small pension savers beware
7 Aug 17
Don't cash in rights without advice
The announcement by the Government that consumers with a guaranteed annuity rate (GAR) on a pension pot of under £30,000 will no longer need to seek advice, is a backward step which will potentially damage the financial outcomes of over a million less well-off consumers.
It completely ignores the fact that at age 65, a £30,000 pension pot with a typical GAR has a real value to an individual of around £55,000. Telling these less well-off consumers that they don’t need to take advice is tantamount to the Government saying it doesn't care if they end up with worse outcomes. I am sure this isn't the intention, but the fact is that poorer consumers have a greater need for sound financial advice as their resources are more limited.
The Parliamentary Under Secretary for Pensions and Financial Inclusion, Guy Opperman, states this proposal will save consumers at least £900 in advice costs, without any explanation of where that figure comes from. Nonetheless, the potential loss to the policyholder could easily be as much as 25 times more than this cost. Conversely, this change will deliver an absolute bonanza for the pensions companies currently sitting on an estimated 1.5 million policies, which include the valuable benefit of a GAR. Many of these policyholders are already disadvantaged by being invested in closed funds or zombie companies.
Take the example of a fund with a face value at 65 of £30,000, which, because of its GAR, has a real value of £55,000. If the individual opts to take the cash, instead of benefiting from the GAR, the insurer enjoys an immediate windfall profit of the actuarial difference between its face value and the real value. I am not saying that taking the cash will necessarily be wrong, as without advice and consideration of the client’s circumstances, it is impossible to know. What I am saying is that, as an absolute minimum, the proposed letter from the insurer to the client should alert them to the real actuarial value of the GAR in cash terms.
Indeed, I would go further and urge the Government to insist that the insurance company provides the client with a voucher of at least £500 to ensure that he or she can be given basic advice on the important options they should consider before simply grabbing the cash. This modest cost for the pension provider will be covered many times over by the windfall profits they will make from clients who choose to ignore the valuable benefit the GAR provides and grab the cash. I believe this is an important issue, which will seriously disadvantage a large number of poorer consumers who need advice if they are to maximise their finances in retirement. This issue needs to be reconsidered by the Government and the FCA without delay.
Ken Davy, chairman, The SimplyBiz Group