The Chancellor has hailed the pensions reforms which came into force on 6 April 2015 as liberalising the pensions market and giving pensioners more freedom to decide how to make use of their pension pots.
A laudable aim indeed but they could also give rise to a raft of mis-selling claims. The auto-enrolment staging dates for smaller employers took effect on 1 June 2015 and are to be fully implemented by 1 April 2017. So, once all employers comply with auto-enrolment, these are risks which could affect all of us.
Easier to withdraw funds …
The changes make it easier for pensioners with defined contribution (DC) schemes to withdraw funds from their pot as a lump sum or income. Pensioners can now withdraw the first 25% of their pot tax-free with any subsequent withdrawals being taxed at the marginal rate rather than at 55%, as before.
The reforms pave the way for all pensioners to take out income drawdown from their pots, if they wish, by removing the old minimum income requirements as well as the 55% tax rate for the beneficiaries of those who died during income drawdown. The beneficiaries of those who die before 75 will take their income tax-free and at the marginal rate after that age.
For those with existing annuities, there will be a consultation on measures to remove restrictions on selling existing annuities. These currently include a proposal to tax such sales at only the marginal rate.
… But more exposure to scams
With pensions scams on the rise, making it easier to unlock funds could further expose consumers.
Phillip D’Costa explains: “We have advised on a large number of claims brought by consumers who were encouraged to transfer their existing pensions into self-invested personal pensions (SIPPs) in the 1990s, with promises that the funds would be invested in overseas property schemes with a guaranteed return on investment. These individuals lost everything when the schemes collapsed.
“The risk profile of these consumers was completely overlooked in flagrant breach of Financial Conduct Authority (FCA) rules, which make it clear that firms advising on SIPPs must also consider the suitability of the underlying investment for the consumer. It is no wonder that the Financial Ombudsman Service’s figures show that SIPPs complaints have soared. More than half of these complaints were upheld in the latter half of 2014."
The recent pensions changes could be a boon for scammers looking to lure consumers with schemes for investing their lump sums and maximising income streams, without complying with the stringent legal requirements which govern the promotion of such schemes.
Making a claim
There are, however, a number of potential routes for consumers seeking to make a claim for compensation including breach of contract or non-compliance with statutory requirements. Such claims might lie against the entity offering the scheme, financial advisers or trustees.
There are strict statutory requirements on financial promotions, both for firms which are authorised by the FCA and for non-authorised firms. FCA-authorised firms and PRA-authorised firms must additionally comply with the detailed rules in the Conduct of Business Sourcebook (COBS), which govern the sale of financial products.
Where advice has been given, consumers may also consider claims for negligence on the basis that the common law duty to take reasonable care and skill when advising has been breached.
There are a number of avenues for redress to explore when considering bringing a complaint or claim. Depending on who the claim might be against, these routes might include anInternal Dispute Resolution mechanism for the Occupational scheme, the Pensions Ombudsman, the Pensions Regulator, the Financial Ombudsman or the courts.
Although the Government has set up the Pensions Wise service to provide independent, impartial advice to consumers on their pensions options, it is expected that the number of compensation claims brought by consumers will only increase as a result of the pensions changes.