OpinionJul 9 2015

Beware fly-by-night firms pushing pension freedoms

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Surprise, surprise. It appears that many more people have cashed in their pension savings in the first two months of the new pension freedoms than the government expected.

It is not yet clear what the impact has been on IFAs, or whether any financial advisers have approved these encashments, however, one certain result is that over this year, George Osborne can expect an estimated tax windfall in excess of £1bn.

According to the Treasury, since 6 April this year some 60,000 pension savers have cashed in about £1bn of their accumulated pension funds. While it is unlikely that much of this money has found its way into the welcoming arms of Lamborghini dealers, a substantial proportion has provided the chancellor with a windfall which is larger than the Treasury’s previous estimates.

Apparently, the government’s assumption was that most people who took advantage of the reforms would spread their withdrawals over 20 or 30 years, while the reality is that the majority seem to be taking it all out at once, regardless of the tax consequences.

For financial advisers however, this raises some very serious concerns, as this demand for immediate cash is only in its infancy, and it is obvious that the new rules have barely started to have an impact.

To judge from the popular press, many clients who want to access their cash are still struggling to carve their way through the morass of rules, bureaucracy and regulations. What this means for advisers is that the number of clients demanding access to their pension savings is likely to increase. As advisers we have a duty to do our utmost to protect clients from themselves by making it absolutely clear to them the risks and the costs of grabbing their cash now.

In the years to come, however, I believe there is an even more dangerous risk to the IFA sector from the new pension freedoms. This is that some firms will capitalise on the public’s naïvety and aggressively target vulnerable clients. They will then shut their firms down before the problems emerge, leaving the rest of the IFA sector to pick up the pieces and of, course, the financial services compensation scheme’s liabilities.

It is therefore essential that IFAs tell the FCA of any firms they think are recklessly facilitating the access of pension cash and also that we continue to campaign at every opportunity for fairer funding of the FSCS. In the meantime, I suspect the Treasury will happily continue to pocket the profits from George Osborne’s “not so little” earner.

Ken Davy is chairman of SimplyBiz