RegulationSep 23 2014

Mis-selling fears over ‘unregulated’ pension lump sums

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The Financial Conduct Authority must do more to close a potential mis-selling loophole that could lead to ‘unregulated sales’ and ultimately clients running down their funds, according to two pension experts.

In response to the Budget at-retirement reforms, HM Revenue and Customs published draft guidance in July detailing three ways for savers to access their pension funds.

The first two are more familiar: either placing a fund into drawdown under a new ‘flexi-access drawdown’, from which consumers can withdraw any amount over whatever period they choose, or using their pension pot, or a portion of it, to purchase a lifetime annuity.

The third option would allow savers to take lump sums from their pension after the age of 55, without crystallising the pot, named the ‘uncrystallised funds pension lump sum’.

Speaking to FTAdviser, Tom McPhail, head of pensions research at Hargreaves Lansdown, said that because there is no product sale involved with the new lump sum option it is not subject to the same regulatory scrutiny as the first two options.

“The critical challenge is to make sure it is adequately regulated. I think there is a real risk of people inadvertently running down their pension funds through unregulated drawdown sales because they went into the ‘wrong kind of drawdown’.”

Mr McPhail said he agreed with Aegon’s stance that the option should be scrapped altogether as it is “unnecessary and unhelpful”, but added that this was unlikely as enough lobbying has been done to get it to this stage.

“The option is really just there to make life easy for pension scheme administrators, and both the Treasury and Department for Work and Pensions don’t seem that bothered, so the FCA has to push against this political will and regulate UFPLS the same way as it does for drawdown.”

Kate Smith, regulatory strategy manager at Aegon, told FTAdviser that the FCA needs to urgently look at this issue if the government is to progress with this option.

“It has not been designed to act in the way that the government is now suggesting it will, I think the pensions scammers will quickly latch onto this as an opportunity to offer unregulated advice and people may not see their money again.”

“There’s definitely a gap here, everything’s so new and there’s so much technical detail. You’ve just got to make it simpler for consumers, but in a properly regulated manner.”