PensionsOct 19 2016

Lisa: the word on everyone's lips

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Lisa: the word on everyone's lips

Scores of industry delegates flocked to London on a cool September’s day for the latest instalment of FTAdviser’s Retirement Freedoms Forum to broaden their knowledge of the ever-evolving pensions landscape.

One of the hot topics at the event, held at The Cumberland hotel in the heart of the capital, was the Lifetime Isa.

Fresh from her stint as pensions minister, Baroness Ros Altmann delivered a damning assessment of the product in her keynote speech.

Baroness Altmann, who held the government role at the time then-chancellor George Osborne unveiled the Lisa, said: “In my view Lifetime Isas risk poorer pensioners in the future and it is a disaster in the making.

"This product has mis-selling written all over it. Just think about it from a customer’s perspective."

Baroness Altmann was particularly scathing in her evaluation of the 5 per cent penalty and the loss of the 25 per cent government bonus on the entirety of the fund, plus any investment gains for unauthorised withdrawals.

“This penalty on withdrawal is punitive," she said. “I just cannot for the life of me see how you can justify that when I worked so hard, for so long, to get the cap on pension exit charges down to 1 per cent.

“I am not surprised that so many providers are saying they don’t want to bother with this thing, not just because they don’t know all the details, but because it is fundamentally – as a pension – not a good product.

“There are no controls on the charges with this. What consumer protection is there?”

In addition, the product may play into the hands of top earners, she said, who have fulfilled the £1m pension lifetime allowance, the £40,000 annual allowance and invested £3,600 into a pension for their grandchildren and are also looking at other ways to help them.

She said: “These top earners have another taxpayer incentive using taxpayers' money for their long-term savings. Is that what we are trying to achieve with the public spending on pension savings incentive? Are those the people we need to be worried about?

“Surely we want to find a way to help ordinary people have better pensions and make pensions themselves work better.”

Her sentiments were echoed to an extent by participants of a panel session, which explored whether the Lisa sounded the death knell for pensions.

The four-man panel consisted of Rob Yuille, assistant director, head of retirement policy at the ABI; Andy Springford, senior manager of Mazars Financial Planning; Chris Daems, director of London-based Cervello Financial Planning IFA; and David Thomas, chief executive of Seneca Investment Managers.

Mr Yuille said the objectives of the Lisa, due to come into effect in April next year, were somewhat confused. 

Mr Springford agreed, naming the product "a gimmick". He said: “I’m not entirely convinced about what gap it is trying to fill. If you use it properly, you can’t access it until you are 60, which is later than the current pension age, and you get fewer tax reliefs for it on top of that [inheritance benefits and marginal tax rates].

“So if you use it properly a pension is still going to be better, but if you don’t use it properly, a regular Isa is going to be better because you will have to pay 5 per cent to take your money out of the Lisa.”

The panel also raised concerns that the Lisa could undermine and reverse the success of the auto-enrolment initiative as people may choose to opt-out and save in the new product.

Mr Daems said he does not envisage the Lisa being the most popular vehicle for retirement savings in the future. Instead, it is likely to be popular with individuals seeking to get onto the property ladder, he added.

Mr Yuille said: “If it [the Lisa] is primarily about housing, and an incentive for the self-employed, that is fine. If we see people opting out of workplace pensions in order to save into Lisas, or if we see people recycling their cash by putting it in a Lisa to take advantage of the government incentive, then it is a problem.

“It is hard to see much that can be achieved through this product that couldn’t already be achieved through the modest revisions of existing products.”

To sum, the panel acknowledged the lure for want-to-be homeowners of the 25 per cent government bonus for annual Lisa savings of up to £4,000, while expressing scepticism about its retirement savings credentials.

Were the 90-plus advisers who attended the event won over by the merits of the product? The answer: a resounding no.

When asked by panel chairwoman Emma Hughes, editor of FTAdviser, to indicate by a show of hands if they would recommend the Lisa to their existing clients, only a handful did so.

Mr Daems said: “It has just added more complexity to a market that actually needs simplicity, and I am not convinced that it will encourage people to save more than they do now.

The Lisa was a last-minute policy. So much so that the product concept was not conceived 14 days before the 2016 Budget, Ms Altmann revealed in her speech later in the day. It is widely recognised by industry commentators as a halfway house towards the introduction of a Pensions Isa regime

The product is due to be introduced in April next year, yet the industry remains in the dark about some details, such as provisions for borrowing against the Lisa and when the government bonus would be paid.

What is more, few providers have confirmed they will offer Lifetime Isas when the product goes live.

Mr Thomas said: “It is quite amazing what is demanded of the industry in terms of response times and late legislation, going to the wire on products and compliance.”

Earlier in the day, Mr Yuille delivered a keynote speech to delegates that notably referenced the Financial Conduct Authority’s Retirement Outcome Review into competition in the retirement income market.

Mr Yuille said he is an advocate of the review, but expressed concern that its remit is too narrow on things like shopping around for drawdown and pricing, adding the City watchdog should explore other considerations such as trust-based pension schemes and the demand for cash.

He said: “I wouldn’t want them to copy and paste their assumptions about shopping around for an annuity and just apply them to drawdown, because the two are fundamentally different.

“Drawdown decisions can depend on a range of things – guarantees, customer service, investments – and in the context of all of those, products and value for money.

“Annuity decisions are clearly more rate-driven. Drawdown decisions are not a once-in-a-lifetime decision. A lot of people do transfer once they are in drawdown. We would like to see these factors to consider filtered into the review.”

Mr Yuille also outlined several initiatives aimed at bolstering consumer engagement with their pension that the ABI has been actively involved in.

He gave credence to the ABI’s managerial role in the development for a prototype Pension Dashboard. He also referred to the development of a guide, called Making Retirement Choices Clear, which aims to decipher some of the more complex industry jargon such as crystallised and uncrystallised funds.

Mr Yuille also waded into the debate on whether there should be a stipulation for consumers to seek financial advice before selling their annuity in exchange for a lump sum, once the initiative goes live in April next year.

He too conducted a straw poll, asking advisers to indicate by a show of hands whether they would consider offering advice if a requirement to take advice in the secondary annuity market was implemented. The result was split on this topic – although a few more advisers said they would not operate in this space.

He said: “There might be an issue with the availability of advice. There are a number of annuities out there that are very small and there will be an issue around the relative cost of advice for those people. I think we are likely to see a requirement to take advice, but only for the higher income end of the spectrum."

He also gave the thumbs up to FCA plans to reform Pension Wise – the industry-funded free financial guidance service – in preparation for the launch of the secondary annuity market.

Michelle Cracknell, chief executive at The Pension Advisory Service, was the penultimate speaker. Highlights of her presentation included the revelation of a plan to allow clients to share the abridged fact-find generated by TPAS’s guidance councillor with financial advisers.

The initiative is straightforward. Users of the guidance service who go on to seek financial advice will be able to pass on their personal report, which is not as detailed as a traditional adviser fact-find, to their adviser.

Ms Cracknell said this would serve as a good “entree” to the development of an adviser-client relationship.

The proposal has been commended by advisers, but many have said their compliance department would prevent them from using the data.

She said: “We spoke to the FCA about it and it said the customer has to own the data and the IFA would need to check up on the data, but we think it would be a great start. 

“We put all the data we collect on our customers in our customer management system, so the ability of creating a report on what the customer has told us is already there, but what we do need to have in place is a safe and secure mechanism for sending it onto the customer. The customer will then be able to share it with their adviser."

She added that the customer will need to take some responsibility that if something they told Tpas "wasn’t quite right", they would correct it when they have a conversation with the adviser.

Ms Cracknell also revealed an increase in the number of people expressing reticence about the legal requirement, since 2015 and the introduction of pension freedoms, for those with pension pots of more that £30,000 to seek advice.

She labelled the mentality as a "sad and unintended consequence" of pension freedoms.

“I think it is part of the British psyche," she said. “I don’t think we like being told what to do and I think one of the roles guidance plays for people is to try to help them understand what they don’t know, and the benefit they can get by investing a bit of time thinking about their pension. Sometimes, as a consequence of that, they realise the benefit of seeking advice."

The final keynote speaker, Neil Esslemont, head of the industry liaison team at The Pensions Regulator, delivered a comprehensive overview on the progression of auto-enrolment.

In short, auto-enrolment appears to be a success. He said 234,589 employers have provided information to show they are meeting their auto-enrolment duties – also known as declaration of compliance – covering 22.8m workers, as at the end of August.

What is more, 3,805 employers have completed a re-declaration of compliance and 229,000 workers have been re-enrolled.

But have small and micro employers begun making plans to enroll their employees into a pension scheme? To answer this question, Mr Esslemont cited a survey carried out by the watchdog that found more than half of micro employers staging this year have not started making plans for auto-enrolment.

Another finding was that those in early stages of auto-enrolment preparation expect it to take longest, while those yet to start expect it to take the least time. Many will leave their preparations to the last minute.

Mr Esslemont said: “We would encourage you to make your [employer] clients aware that their duty is coming up and not to leave it [preparations] too late. That is partly because of the sheer volume of employers who are hitting their staging date for the first time.”

Not realising that temporary workers come within the scope of auto-enrolment and that all workers must be automatically enrolled before they can exercise their right to opt out are among the common compliance issues for employers, he said.

Failure to comply with auto-enrolment requirements could prove costly for firms, with escalating fines reaching as high as £10,000 a day for companies with 500 or more members of staff.

Mr Esslemont said Swindon Town Football Company was the first employer to be issued an escalating penalty notice, totalling £22,900, for failing to put eligible staff into a scheme, pay contributions or write to staff explaining how automatic enrolment affected them. The club also had to pay £13,613.39 in outstanding pension contributions.

He said: “Make sure your clients know what you are doing and make sure that you know what they are doing because we have had people who have gone non-compliant because they thought their adviser was doing it, but it had transpired they didn’t.”

Myron Jobson is features writer for Financial Adviser 

Key points

Scores of industry delegates flocked to London on a cool September day for the latest instalment of FTAdviser’s Retirement Freedoms Forum.

The lifetime Isa is due to be introduced in April next year, yet the industry remains in the dark about some details.

Auto-enrolment appears to be a success.