An ombudsman has ordered advice firm Portafina to pay compensation after giving unsuitable advice on a pension transfer, despite the client acknowledging he was "insistent".
Portafina told the client, referred to as Mr C, the critical yield was unlikely to achieve a growth rate to match the guaranteed benefits of his occupational pension scheme and recommended against the transfer.
But Mr C still wanted to go ahead with the transfer to a self invested personal pension (Sipp) and Portafina agreed to help him if he completed an "insistent customer form".
As a result of the transfer, the client now has illiquid investments and is unable to take benefits from his pension, but the investments cannot be sold or exchanged for a cash sum without incurring a substantial financial loss.
Following a complaint to the Financial Ombudsman Service, it ruled the adviser had given poor advice and compensation should be made to the client to put him in position he would now be in if he hadn’t transferred.
David Ashley, an ombudsman at the Fos, said: "Our adjudicator asked Mr C what he would have done had everything been explained to him in understandable terms. Mr C has said he wouldn’t have made the same decision to transfer.
"Clearly, I need to treat his evidence with some caution given it’s said with the benefit of hindsight. But I think, ultimately, it came down to a choice of having a guaranteed income in retirement or a new conservatory.
"I accept that Mr C would likely have thought a new conservatory might have been nice to have. But it doesn’t appear that the adviser discussed Mr C’s reasons for not accepting the recommendations and advised that it just wasn’t a financially sensible decision to transfer given his circumstances and the risks of a significantly lower pension.
"Accordingly, I’m not persuaded that the transfer was suitable given Mr C’s circumstances, his moderately cautious attitude to risk and the critical yield required on the transfer value. And neither am I persuaded that Mr C would have insisted on the transfer if the adviser had discussed his reasons for insisting on it, explained his options in full and still recommended against it."
As well as a conservatory, Mr C wanted to access tax-free cash to build an emergency fund but wasn’t able to access his funds until the age of 65 so he chose to transfer his scheme to a Sipp to access a tax-free lump sum of £15,000.
The transfer value at the time was £63,000 and the critical yield required on the transfer value to match the benefits from the former scheme was 10.1 per cent, leading Portafina to tell the client that it was not in his best interests to transfer.
Portafina told Mr C if he still wanted to make the transfer, it could treat him as an "insistent" customer and that he would need to complete an insistent customer form which it included with its letter.
Mr C replied to the letter saying he was aware that it was unlikely his new policy was going to achieve a growth rate of 10.1 per cent to match the benefits of his occupational pension scheme.
"I am aware that transferring my guaranteed [OPS] is against the advice of [the firm] and I understand that I will be worse off in retirement, I still wish to proceed with taking my benefits now," Mr C said in his response letter.
In response, the adviser wrote to Mr C and said: "You have decided that you still wish to proceed with pension release.
"We will assist you with this and have treated you as an insistent client. I would normally recommend that you leave your pension benefits where they are as this will be most beneficial to you in retirement.
"However, during our telephone conversation you advised me that you are aware of the downfalls in taking your benefits now but due to your current circumstances you would like to take your benefits immediately."
But the Fos found that Portafina had not at the time adequately assessed Mr C’s financial position and found that, if he had waited until his normal retirement date, his original pension scheme could have provided a tax free lump sum of £22,173 and a pension of £3,326 per year.
Fos has ordered the firm to pay compensation to undertake a redress calculation in line with the Financial Conduct Authority’s pension review guidance as updated in October 2017 and that it should assume that Mr C accessed his benefits at age 60.
If Portafina was unable to buy all the illiquid holdings from the Sipp then it should pay Mr C an upfront lump sum equivalent to five years of Sipp fees, the ombudsman has said.
The Fos also said Portafina should pay the client an initial £400 for the distress and inconvenience caused as he wanted to take income from his pension but is unable to access it.
Jamie Smith-Thompson, managing director of Portafina, said: "Our initial and extremely clear advice was for the client to not transfer this money.
"We then put clear barriers in place for the client to have to cross including completing and supplying forms to us, to confirm their understanding that their decision was against our advice. This was then further confirmed to the client in the recommendation report, which clearly stated, ‘you are going against our advice. However, this is what you need to do if you insist on this course of action.
"Whilst this case pre-dates the pension freedoms, for all intents and purposes, the client has followed a freedoms route to do exactly what they wanted to do. We would love to contest this decision by the ombudsman because it’s not in the spirit of the pension freedoms, but this option is not open to us.
"There are a number of problems an adviser has to contend with in situations like this. First of all, the regulator says you should be able to deal with insistent clients and they can go against your recommendation. However, there is conflict between what the regulator is saying and what the ombudsman is saying. This ombudsman decision is clearly saying, actually, no we can’t. But we also have inconsistent outcomes from the ombudsman.
"What are you supposed to do when the regulator tells you one thing, then the ombudsman variously agrees and disagrees with them years down the line?"
rosie.quigley@ft.com
