Freedoms: a tangled web

Let us take the last of these first. Sure, there was a lot of complexity built in to old-fashioned pension products, largely driven by the old life companies’ desire to hide charges and commission, and make the product seem better value than it really was. But in the past 15 years, when platforms started to become established in the UK, further complexity has been imposed by all the different regulators involved in pensions.

By far the main culprit has been Revenue & Customs, and standing behind them, the politicians. You may recall 2006’s much-vaunted pensions simplification legislation, which seemed very sensible in principle and pointed the way forward for a sensible framework that all parties could buy in to.

But what happened after that? Taking one simple example, the lifetime allowance. How many times has that been changed either up or down – and why? The reality is, of course, that decisions to play with the rules are driven by the desires of the Treasury and short-term needs for revenue. The government sees pension savings as ‘captive’ money, with the sums involved being enormous and therefore subject to political expedience.

Yes, pensions are enormously complex, but thanks to HMRC and its masters, any investor who makes decisions on his own without taking good quality advice (sorry, those of you who are spending oodles on D2C propositions) is asking for trouble. One mistake and you could end up paying a hefty tax charge for it, and these decisions, once made, are irreversible.

And I am willing to bet that many unfortunates are already in that position without realising it. No one who is not involved full-time in pensions can hope to keep up to speed with all the nuances involved, and the enormous interest in D2C and ‘robo-advice’ will inevitably lead to poor customer outcomes unless the regulations surrounding pensions, particularly on tax, are radically simplified. On top of this, research has proven that customers want to be told what to do when dealing with the great unknowns of “how long will I live?” and “what will the investment returns be?”.

That brings me to the next point – the cost of advice and the complexity of advising on pensions combined with an ever-expanding compensation culture. Complexity means that the work involved in advising on pensions is in-depth, requires specialist expertise and is time-consuming, so obviously it is going to be expensive. No one can be surprised at that. Then there is the risk of claims for compensation that can often come years after the advice has been given, with the investor realising with the benefit of hindsight that he might have made a bad decision. In the culture we now live in, the first thing to do is to find someone to blame and then go for compensation.

This risk is so great that many advisers are simply just refusing to advise investors on taking their pension as a lump sum, and who can blame them? The FCA a few months ago published guidance on dealing with ‘insistent clients’, stating that when transacting business they have advised against, advisers should ensure they have followed “the normal advice rules”, including doing a thorough fact-find and suitability report, and advising in the client’s best interest.

Let us go back a few years to the days when the personal finance industry was dominated by the life insurers, most of whom have now gone. The government has announced that it is going to launch a consultation into punitive exit charges (ending on 21 October) which could open up another can of worms. The concern here is that some providers, particularly of old legacy products – the life insurers – have not provided the flexible options that are intended by the new regulations, but then impose excessive charges if the customer wants to move to a product that does offer the options. Heads I win, tails you lose.

Some of you may remember the old life company tricks of market value adjusters (that is, while we tell you that you have £X in your pension, we will only give you £X minus £Y if you try and take your cash) and capital units, whereby the annual charges on capital units were higher than the normal units bought by the customer.

Well, I have news for you, and it is not good. The annual excess charges on capital units were not in fact annual at all – the company actuary worked out a formula to take out all the future annual charges upfront, and that money is long gone into the life company’s coffers. The charge that is quoted when the policyholder wants to transfer his pension pot is just the difference between £X and £Y, because all the company actually holds is £Y. If the government then says that providers cannot levy these apparent charges when the pension policyholder tries to take their money away, those providers could well go bust if they are forced to make the pot up to its nominal value of £X. This is a big problem to which it is hard to see a straightforward solution.

Having said all this, I am actually a big fan of pension freedom, and a supporter of the new regulations. I fervently believe in small government and personal liberty coupled with personal responsibility. The headline stories about £1bn already having been taken out of investors’ pensions are just that – scaremongering. What else did they expect? The amount involved hardly scratches the surface of the amount invested in pensions, and the average pension pot being cashed in is just £16k. Who can blame someone with that amount of money for taking it out, perhaps to pay off a debt, when the alternative is, frankly, to subsidise the government in the future?

The experience of similar regulations in Australia has been that investors, instead of blowing their pensions savings on a new sports car, have spent as little as they could, being worried about their cash running out, with living standards dipping as a result. Despite all the pessimism, pension freedom must be the way forward for a rapidly ageing population comprising people who need to take responsibility for themselves instead of falling back on the taxpayer. But the government will only succeed in its pension freedom aims if it makes pensions advice feasible, if it makes the regulations around pensions radically simpler, and if it stops treating pension savings as a political football.

Bill Vasilieff is chief executive of Novia

Key points

Old-fashioned pension products were highly complex, largely due to the old life companies’ desire to hide charges and make the product seem better value than it really was.

Thanks to HMRC, any investor who makes unilateral decisions about his pension without taking good quality advice is asking for trouble.

The headline stories about £1bn already being taken out of investors pensions are just scaremongering.