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Pension freedoms and vulnerable clients

Under the pension reforms, anyone over 55 can now access their pension pot – giving rise to all manner of discussions related to the wide variety of scenarios this opens up. However, one of the more overlooked areas has been that of vulnerable clients.

The FCA’s definition of a vulnerable client is broad, and firms should determine how they are going to apply this. In doing so, firms should recognise that vulnerability can be temporary, gradual, such as dementia, sporadic or permanent in nature, such as indebtedness or chronic health conditions. It is not necessarily the case that these issues will always define the client as vulnerable, but the client’s circumstances can be exacerbated by the actions or processes of firms.

According to the FCA: “A vulnerable consumer is someone who, due to their personal circumstances, is especially susceptible to detriment, particularly when a firm is not acting with appropriate levels of care.”

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Detriment is equally broad and could mean choosing the wrong product or service, overpaying for these, or being treated unfairly by a business in the course of their interaction. This might mean a client being treated unsympathetically, or the business failing to make reasonable adjustments to meet their needs.

Those deemed vulnerable as a result of disabilities or impaired mental capacity, are joined by others who have lost their employment, suffered bereavement or are seriously ill. Therefore, during the course of their lives, many consumers might be considered vulnerable.

Consumer credit came under the FCA umbrella last year, subsequent to which, depending on their permissions, advisers may or may not be allowed to offer advice on debt management.

Most adviser firms are unlikely to be offering such services, as that type of client is not their target market. However, they may encounter a number of over-55s who wish to review their exposure to debt and take the opportunity to reduce or eliminate it by releasing some or all of their pension fund.

In most cases, this will come under the realm of debt counselling, and it is entirely reasonable for more risk-aware clients, where the interest rate may well exceed what returns they might expect from their pension funds if they were left untouched.

The challenge is to recognise that clients may be vulnerable and, if they are seeking to settle debt, to ascertain if they are in any level of financial distress – that is, debts out of control and struggling to manage them.

Care must be taken here, as debt management services may be involved. So while accessing pension funds may be an integral part of the solution, if an adviser does not have the relevant permissions then clients should be told to seek appropriate advice prior to discussing utilisation of their funds.

They will still need money to live on in retirement, and taking cash out now may well precipitate tax consequences if they avail themselves of more than their pension commencement lump sum.

And if a client continues to work while accessing cash under the new freedoms, they will trigger the new £10,000 money purchase annual allowance, which may restrict their ability to make future contributions.