Pension Freedom

What are Pension Freedoms?

Pension laws changed quite radically on 6 April 2015. The government brought about these changes in order to give people more ‘freedom’ and ‘control’ when it came to drawing money out of their pension fund.

One significant change was that, if you were aged 55 or over, instead of using the fund to buy an annuity (which is a product that pays you an annual income for life), you could now take the whole fund and do whatever you liked with it! The first 25% would be tax free, but the remainder would be taxed at the normal rates, as if it were income.

Sounds great, doesn’t it?.....and it’s true to say these changes meant that many people in the UK had access to life-changing amounts of money that they ordinarily would not have had access to; money that may made an immediate and significant difference to their quality of life and perhaps at a time when they needed it most?

But, as you might expect, there were both seen and unforeseen consequences that followed the changes. This was particularly the case for people who were fortunate enough to have a Defined Benefit pension, also known as a Final Salary pension. The changes now allowed these people to move either their existing or their preserved DB pension schemes into a Defined Contribution (DC) personal pension arrangement and to access (should they choose) the whole pot of money from age 55. Previously, they would have had to wait until aged 65, perhaps, and even then, they wouldn’t have been able to access all the cash in one go.

Sounds like a Win-Win!

It does, doesn’t it?...and it was and still is… for most of the people involved.

The government may believe that they have ‘won’ because it collected billions of pounds in extra tax revenue from the people who wanted to take more than the 25% tax free element out of their pension pots.

The big players in the insurance industry will no doubt feel they won, as billions upon billions of pounds of clients’ money was invested into their funds, each with its own management charge… after all, they don’t manage the money for free, you know!

The ceding scheme employers, they could feel they had won too?… as now that the DB pensions had been transferred, they were relieved of the onerous liability of ensuring they had enough funds to pay billions of pounds of future guaranteed income payments to the DB pension holder.

The financial advisers and their huge networks, must have felt that they had won too with a new and very lucrative income stream opening up to them, where they could charge the person transferring their pension initial and on-going charges.

You may have been introduced and advised to transfer your DB Pension through a network of individuals and businesses who may have received huge commissions as a result. Surely, they will feel that they won too?

And last and by no means least, the person transferring their gilt-edged DB pension won, didn’t they?... because they were empowered with the ‘freedom’ to take ‘control’ of their pension fund. Many probably withdrew a load of tax-free cash and settled back, content in the knowledge that they were considerably richer than they had previously thought!... for a while, at least!!

Ignorance is bliss?

In his poem, “Ode on a Distant Prospect of Eton College” (1742), Thomas Gray famously said: “Where ignorance is bliss, 'tis folly to be wise.”

Were you ‘blissfully happy in your ignorance’ after you were advised to transfer your DB/Final Salary pension scheme?

Did you arrange to take some tax-free cash to pay off the mortgage, perhaps? Or buy a new car or go on that holiday of a lifetime…..or all three? After all, in the past few years, the transfer values on offer from these sorts of schemes have been undeniably huge.

Or, was it a case of folly because you did not wise up?...

Did you make sure you were fully informed about the decision to transfer?

Did you completely understand the guaranteed benefits you would be giving up?

Did you realise the risks your pension pot would be exposed to following the transfer?

Did you know that, in many cases, the person advising you only got paid if you transferred?

Did you understand the charges you were now exposing your pension pot to?

Were you aware that the sector regulator, the Financial Conduct Authority (FCA) believes a transfer, other than in exceptional cases, is likely to be bad advice?

Why was it wrong for me to transfer my pension?

It’s not always wrong, but here are just a couple of reasons why it may be…

When you transfer your DB/Final Salary pension, you give up a number of guaranteed benefits that you cannot get back. For example, transferring to a Defined Contribution (DC) personal pension arrangement means giving up the income that your DB scheme guaranteed to pay you for the rest of your life.

Also, the income was most likely due to increase each year in line with inflation, so that it didn’t lose its buying power. A DC scheme offers no such guarantee, and the value of your pension fund is affected by changes in the assets you invest in, i.e. shares, bonds and property etc, which move up and down in value.

Furthermore, in a DB scheme, the employer and scheme trustees are responsible for making sure there is enough money to pay your guaranteed income and, if things go wrong, there’s a ‘lifeboat’ called the Pension Protection Fund which underpins the guarantees.

For you, there are no charges to pay with a DB scheme. In a DC scheme, however, you or your financial adviser are responsible for managing your pension pot until it runs out and there are charges involved…..a lot of them…..which can impact significantly on the size of your fund and how long it will last. This may involve charges for the initial advice to transfer, charges for how to invest the fund, charges to the new pension scheme operator and investment managers and charges for on-going advice.

Why is the FCA allowing all this bad advice to go on?

It’s question that has been asked. It could be a powerful argument to say that the financial services regulator, the FCA, has been slow out of the blocks on this hugely important issue, especially given that one of its raison d’être is to protect the British public from these kinds of misdemeanours.

Transferring your DB pension is probably the most complex, personal financial decision a person will ever take, but it’s only very recently that the extent of the bad advice and its ramifications for individuals has been highlighted. We are now seeing regulatory focus and action.

In its annual 2020 ‘sector views’ report, the FCA indicated that unsuitable transfers from DB schemes could result in losses of up to £20 billion in client guarantees over the next five years and that failures in the DB transfer space were putting clients off pensions altogether.

Furthermore, the FCA confirmed that, “Unsuitable DB to DC transfers remain a significant source of harm. The cost of getting this wrong can be very high, as consumers are giving up valuable guarantees and must manage longevity and investment risk on their own”.

In an attempt to prevent further abuse occurring, the FCA has now implemented some meaningful changes, but sadly, for many, it may be too late. And to compound matters, many financial advisers thought they knew how to advise their clients correctly. However, according to the FCA, it appears they thought wrong, and many have since gone bust as a result of claims against them for the unsuitable advice they’ve given.

What does seem apparent from the above comment of the FCA, is that DB transfers may have occurred when it was clear, or ought to have been clear, that the transfers were not in the best interests of you as the client.

In the last few years, hundreds of firms have either stopped, or been stopped from advising their clients to transfer their precious DB pensions.

How do I know if I got bad advice?

It’s quite simple, if a financial adviser recommended that you transfer your DB/Final Salary pension, unless you had very special and individual circumstances, our preliminary view is that you may have been badly advised. Listed below is the type of information that the financial adviser should have asked you about prior to recommending a transfer.

If you answer ‘no’ to ANY of the following questions, you should contact us to discuss your individual situation and we can establish if you received unsuitable advice and may be entitled to damages and compensation.

Did your financial adviser ask you about:

• You and your family’s circumstances and how much income you would need to support your family throughout your retirement.
• You and your partner’s employment, current income and expenditure, tax position and entitlement to any state benefits
• You and your partner’s current health and family history
• What other pensions, assets, and debt you and your partner may have, or any dependency on state benefits
• Your priorities and spending plans up to and during your retirement.
• How much risk you were prepared to take with your retirement fund and your willingness to have less income, should your pension fund perform badly.
• Your knowledge and understanding of DB and DC schemes, their risks, benefits, and the benefits you would be giving up by transferring.
• Considering alternatives to achieve your goals without transferring your DB pension.
• Purchasing a guaranteed lifetime income (annuity) if you were in average or good health.
• The fact that there were initial and several on-going charges upon transfer and thereafter (perhaps that you are only now aware of) compared to no charges staying in the DB pension.
• Maximising the potential for good investment returns and did not show you what the effect of inflation, high charges and poor investment returns could have on your retirement income.
• The Pension Protection Fund and how your retirement income would be protected, if your old employer went bust.

Again, if you answered ‘no’ to ANY of the questions above, you should contact us to discuss your individual situation and we can establish if you received unsuitable advice and may be entitled to damages and compensation.

Alternatively, rather than showing you how keeping your DB pension where it was could meet your retirement needs, did your financial adviser focus more on:

• Giving you flexibility and control of your pension.
• Maximising the death benefits payable upon your death.
• Helping you achieve early retirement.
• Helping you to take a larger tax-free lump sum.
• Investing your fund into hotel or student accommodation, storage or parking schemes, forestry, precious metals, or any other unusual investment
• Going ahead with the transfer despite the adviser recommending you not to transfer

If the answer is ‘yes’ to these questions, the same applies; Please contact us and we can assess your individual situation and establish if you received unsuitable advice and may be entitled to damages and compensation.

How much can I claim?

Compensation is payable for losses incurred. Pension losses can occur simply be transferring your DB pension and investment losses can occur if your fund was invested in inappropriate investments.

There may be a number of parties against whom a claim can be made arising out of the whole circumstances surrounding your Pension Transfer.

If a firm that advised you to transfer went bust before 1/4/19, the maximum pay-out from the Financial Services Compensation Scheme would be £50,000.

If the firm that advised you went bust after 1/4/19, the maximum pay-out from the Financial Services Compensation Scheme would be £85,000.

If the firm that advised you is still trading, but they reject your complaint, the maximum compensation the Financial Ombudsman Service would compel the firm to pay is £160,000, if you were advised before 1/4/19 and up to £360,000 if the advice to transfer was given after 1/4/19. However, should the firm that advised you to transfer uphold your complaint and agree to pay you compensation without any Financial Ombudsman Service intervention, there is no upper limit of compensation.

There is no upper limit on damages and compensation payable should the matter proceed via Court Action or Mediation and you are successful in the sense of an award of damages and compensation by a judge hearing the court case, or agreement is reached by the parties in a process called Mediation.