Pension providers should be forced to issue risk warnings on a little-known rule that could see over-55s deprived of means-tested benefits, according to Scottish Friendly.
The rule in question relates to the "deprivation of capital", and gives the Department for Work and Pensions discretion to deny people means-tested benefits if they draw down too quickly on their pension.
Scottish Friendly's commercial director Neil Lovatt said the rule was not widely understood, and left retirees vulnerable to being penalised by a rule they did know about.
Mr Lovatt's call came after the Financial Conduct Authority announced Lifetime Isa providers would be required to issue customer warnings stating they could miss out of means-tested benefits if they opted for a Lisa over a pension.
He claimed this rule unfairly penalised Lisa providers, since pension customers faced a similar dangers thanks to the deprivation of capital rule.
Announced in March 2015, the rule applies to people who "deliberately" spend their pension so that they can claim means-tested benefits.
DWP's 2015 statement reads: "If you spend, transfer or give away any money that you take from your pension pot, DWP will consider whether you have deliberately deprived yourself of that money in order to secure (or increase) your entitlement to benefits.
"If it is decided that you have deliberately deprived yourself, you will be treated as still having that money and it will be taken into account as income or capital when your benefit entitlement is worked out."
Mr Lovatt described the FCA's decision to add the new risk warnings to the Lifetime Isa as a "welcome and thoughtful move", but argued "similar explicit obligations" were required pension freedoms.
"Under the deprivation of capital rule, people who take too much money out of their pension pot and then have to apply for state benefits may find they are denied this.
"This issue needs to be explicitly addressed at the front end of this process, not by DWP bureaucrats making judgments on pensioners with the benefit of hindsight," he said.
He said such a risk warning should come at the moment a pension customer makes their first drawdown under pension freedoms, which is allowed any time after age 55.
However, Mr Lovatt conceded that this could prove logistically difficult, because contract-based pension schemes are regulated by the FCA under the auspices of Treasury, while trust-based pension schemes are regulated by The Pensions Regulator, under the auspices of DWP.
He said he could "easily see some interdepartmental conflicts arising" in such a move.
Former pensions minister Steve Webb has stated that, during his tenure as a DWP minister between 2010 and 2105, there was a turf war over pensions between his department and Treasury.
Pension freedoms and the Lisa are both Treasury policies. However, both have implications for the DWP, with the "deprivation of capital" policy one example.
Mr Lovatt said he was unaware of whether or not DWP had applied the rule.
Ricky Chan, director of IFS Wealth & Pensions, said he had not been made aware of the deprivation of capital rule, but said it contradicted former chancellor George Osborne's assurances that there would be no repercussions for making full use of pension freedoms.
He conceded, though, that such a rule was probably necessary to "keep the whole system sustainable".
But he said that a compulsory warning would not work because people tend to ignore them.
"There is already way too much mandatory disclosure," he said.
He put the emphasis on educating the public, through guidance bodies like Pension Wise.
Overall, he said he did not think the risk to consumers was great.
"It will only affect a minority. The majority of people will be smarter with their pension planning," he said.
While the FCA has no explicit requirement to warn customers of the deprivation of capital rule, a spokesperson for the regulator pointed out they were already required to "consider" means-tested benefits in their risk warnings when members access their pensions.
james.fernyhough@ft.com
