RegulationSep 21 2017

Advising on pension strategies with vulnerable clients

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Advising on pension strategies with vulnerable clients

Pension planning has become more complicated thanks to pension freedoms and the issues around defined benefit transfer regulation, but adding vulnerability into the mix brings an extra layer of difficulty.

This is especially a concern for pensioners who risk having their retirement savings stolen by what the Work and Pensions Committee has called a "new breed of pension crooks".

In September, the Work & Pensions Committee launched an inquiry into whether and how far the pension freedom and choice reforms are achieving their objectives and whether policy changes are required.

Among considerations is that people are making their pension choices without the support available, increasing the risk they will not get the best value from their savings.

Of people aged 55 and over and planning to retire in the next two years, just 7 per cent used the free and impartial Pension Wise guidance service.

The Committee is inviting written evidence on any or all of the following by Monday 23 October, including recommendations for improvements.

Scrutiny

With growing regulatory and government scrutiny over pensions and vulnerability, Stephen Lowe, group communications director for Just Group, says it is worth firms taking time to get it right.

It is, partly, the role of an adviser to make a client aware of this likelihood, and to explain the options available to them in order to afford care later down the line. Jacqueline Berry

He states: “Pensions are an area of concern to the Financial Conduct Authority (FCA), which has specifically talked of how new groups of vulnerable customers can emerge, such as those retirees at risk of financial scams, following the introduction of new pensions flexibilities.”

Politicians and industry are not scaremongering: the figures back up their concerns. In August, the City of London Police released figures saying £42m had been lost from pension pots to scams within just two years of the 2014 Budget.

It warned many vulnerable pensioners had been hit twice – after being identified by the fraudsters as potential targets, they had been able to scam them repeatedly. 

This is not just affecting those in later life but also those in their late 50s and early 60s, many of whom are going through great social change, such as retiring from full-time employment or divorcing.

These events could cause short-term periods of vulnerability which, if exploited, could mean long-term financial detriment throughout their pensionhood.

Keith Richards, chief executive of the Personal Finance Society, says: “Social change has resulted in additional vulnerabilities linked to divorce. The over 60s are exhibiting the greatest increase in divorce rates in the UK – the so-called ‘silver splitters’.” 

Pension journey

When starting the pension advice journey, it is imperative that advisers know all the facts before beginning the advice relationship. 

Claire Trott, head of pensions strategy for Technical Connection, explains: “All advice is individual to the client and this is just the same with vulnerable clients. 

“Additionally, their needs may be more complex, so a full understanding of all the client’s assets and liabilities will be needed, as well as any planned support the family or friends may be providing to ensure the best plan is in place.”

She says this plan should be reviewed frequently because “circumstances can change rapidly” and if not addressed, could spiral and make things worse.

Jacqueline Berry, director of My Care Consultant, says it is important to keep an eye on clients as they approach their later years, as this will affect the financial plans that need to be made.

This will affect long-term care in particular. She explains: “All retirement planning should include the consideration that long-term care might be needed at some stage.

“Long-term care is one of the most expensive costs in a lifetime – the second largest expenditure an individual can face after taking out a mortgage. 

“It is, partly, the role of an adviser to make a client aware of this likelihood, and to explain the options available to them in order to afford care later down the line.”

She makes the point the average annual costs of residential care in the UK are now at £30,000 – higher than the average gross salary. 

Self-harm and drawdown

The complexity of pensions freedoms means many people might “self-harm”, as James Dingwall, chief executive of Thistle Investments, puts it. 

They might see headlines about taking cash, or hear from their colleagues about transferring their pensions and not understand the tax consequences, or know how detrimental it could be to them to draw down too much, too soon, from their pension pot.

 

This affects people without vulnerability – so the situation could be even worse for people with low levels of English or literacy and numeracy, or for those less able to comprehend what can be complicated tax events. 

Advisers are building integrated services for those in later life that can be obtained through a single point of access . Keith Richards

Steven Cameron, pensions director at Aegon, says the City watchdog is right to warn people of the risks of not getting advice before drawing down their retirement income.

“Those who don’t seek advice risk making poor decisions.” he says. 

But how do advisers explain to a vulnerable individual that if they request a tax free cash lump sum, they may be transferred into an ‘income drawdown product’, as suggested by the FCA’s July 2017 FCA’s Retirement Outcomes Review Interim Report, even if they have no plans around how or when to draw income?

The long-term pension plan

When it comes to the strategies employed for retirement, there are additional “pitfalls” firms will need to help clients avoid, according to Mr Lowe.

He says: “Given that general understanding of pensions and income options tends to be quite poor, advisers must tread with care.

“While clients' circumstances will differ, most will need a regular income to pay the bills in retirement, and will have a limited capacity for loss.”

This is as true of non-vulnerable as vulnerable clients, but it is important to make sure vulnerable clients “truly understand the product and the advice”.

Tony Gammon, director and head of client services for Thesis Asset Management, says discretionary fund managers are not responsible for long-term care planning.

However, he says it is important that all parties in the investment process pay close attention to the investment plans.

Mr Gammon states: “In general, we work on the principle we need well-designed investment plans, which are straightforward and understandable, and that we are flexible and respond in each case to individual circumstances.”

Indeed, the FCA’s rules for financial advisers in its Conduct of Business Sourcebook (Cobs 9.2.1) specifically require firms to ensure: 

Any recommendation is suitable for a client in light of their knowledge and experience in a financial situation, and investment objectives.

Ensure the client is financially able to bear any risks consistent with their objectives and they adequately understand the risks involved in any transaction.

Integrated service models

For these reasons – the need for investment suitability, protecting clients as they age and creating proper strategies to cater for a range of vulnerability – many advice firms are creating integrated services for pensioner clients.

Mr Richards comments: “Advisers are building integrated services for those in later life that can be obtained through a single point of access and are built upon good practice in terms of vulnerability, mental capacity, appropriate communication and enhanced soft skills. 

“This is also cognisant of the fact advisers are frequently dealing with substitute decision makers in the form of family or friends when the client has not lost mental capacity, or attorneys or deputies where it has.”

He outlines such propositions as including: 

  • Financial advice: cash flow forecasting; retirement income strategies linked to patterns of consumption and flexible enough to fund care fees; generational wealth transfer strategies; use of residential property, such as equity release; care fees funding; and divorce settlements.
  • Non-regulated care advice – distinct from regulated ‘paying for care’ advice.
  • Property management services.
  • Specialist legal advice.

When it comes to pensions planning in particular, however, Mr Lowe adds: “Rather than focus on any one solution, the key point is for the adviser to take care when framing decisions to stop clients from, in the FCA’s words, ‘Overestimating the value because a product has been presented in a particularly attractive way that highlights benefits and under-emphasises charges’.”

simoney.kyriakou@ft.com