It has been customary in recent years for George Osborne to pull a proverbial rabbit out of his red ministerial box. While the press have been chewing over Mr Osborne's most recent rabbit (namely, the "National Living Wage"), the implications of his last rabbit are just now being fully realised.
Readers will probably not need reminding that in Mr Osborne's 2014 budget, the Chancellor of the Exchequer revolutionised pensions by giving savers full access to their pension pots upon reaching the minimum retirement age of 55. In short, the Government removed the requirement on savers to annuitise at least 75% of their pension savings upon retirement.
These reforms have been lauded and feared in equal measure. Many commentators celebrated the trust the Government has placed in pensioners to make wise investment decisions upon their retirement; however, other commentators were/are concerned that a minority of pensioners may make "incorrect" investment decisions and/or be preyed upon by nefarious fraudsters.
Recently, two startling statistics have been released: (1) pension administrators have confirmed that requests for "transfer values" from savers with defined benefit schemes (who currently cannot benefit from the reforms) have almost doubled this year; and (2) it has been estimated that, since the reforms came into force on 6 April 2015, pensioners have drawn down approximately £1.8bn in cash.
Clearly the pension reforms are popular, but the above statistics raise two questions: (1) where are savers transferring their pensions to; and (2) where has £1.8bn in cash gone? If one assumes that there hasn't been a spike in Lamborghini sales, it is possible that pensioners are investing their cash into property or paying down debts or investing in one or more new products that provide a retirement income.
Unfortunately - low interest rates, unsophisticated investors and retirees living longer, could potentially create the perfect storm for the financial services industry. It is not difficult to see how investors could be attracted to riskier products, where classically safer investments have been offering historically low returns since the global financial crisis in 2008-9.
The Government (and its regulators and agencies) have recently been shutting down a number criminal schemes, but it is inevitable that a number scheme will slip the authorities' nets. If a pensioner loses all their life's savings in a fraudulent scheme, they may well seek to recover all or some of their investment from their financial advisors. Claimant law firms are already stalking for business.
Financial advisors will understandably want to ensure that their clients make the most of the new pension freedoms, but there are a few practical considerations and steps that they can take to protect their own positions:
- Ensure that thorough due diligence has been completed and documented before any new financial product / investment opportunity is recommended to a client;
- Ensure that the risk profile for every client is recorded; and
- Financial product / investments must be "suitable" for the client, ensure that all suitability analysis and client advice completed and documented.
The above steps are not rocket science; it should all be second nature to prudent financial advisors, but it is important to remember that if a pensioner loses his or her entire life's savings, they only have the welfare state to fall back on – therefore, there is going to be considerable political pressure on the strict enforcement of regulations to ensure (as far as possible) that pensioners do not lose out.
As the nanny state (slowly) recedes and British pensioners are finally trusted to make sensible and financially astute decisions about how to provide for their own retirements, it is inevitable that certain disreputable persons in society will seek to take advantage of the new world. Financial advisors must therefore be live to prospect of fraud at all times – if it sounds too good to be true...