Another year and yet another system to get money out of a pension. Pension loan schemes have recently attracted the attention of the Financial Services Authority (FSA), which thinks they are unlikely to be in clients’ best interests.
The schemes reflect a desire for ready cash, a contempt for pensions and a lack of visibility on the part of advisers regarding mainstream debt management.
Strictly speaking, pension unlocking has been around for a while. Offering access to the 25% tax-free cash at age 55, while the pot remains invested as pension, is one kind; pension loan schemes are now another.
The schemes typically operate by transferring the pension fund to a separate corporate bond. The company issuing the bond then agrees to loan the client half the amount as cash.
Not only are pension loan schemes a bad idea; they are not much different from the debt consolidation companies and easy credit offers being lapped up by the public. Both invite the consumer to mortgage future security for ready cash. It is the sort of thing recessions are built on. So where are the advisers offering responsible alternatives?
People need protection
Sam Caunt, head of compliance at Kingston IFA, reported a firm he found offering pension loan arrangements in a shopping centre to the FSA.
‘People need protection from this kind of offer,’ said Caunt. ‘But it is very difficult to get our message out and say: we do pensions, pensions are sexy. We do not get the message across. Things like this play on the idea people still have that their pension is their house. But with these loans, they are giving up something they cannot replace. It is fine to pay off debt, but the cost should not be your pension.’
Rachel Reeves (pictured), the Labour shadow pensions minister, was recently challenged on whether she supported auto-enrolling someone with debts into a pension. At a recent Scottish Widows pension report briefing, Reeves was asked for a ‘yes or no’ answer to that question. She answered ‘Yes’. It will be interesting to see if her party addresses this tension in an interim policy report.
Indeed, the government recognises the problem and the withdrawal of tentative early access ideas should not be seen as government’s dismissing them altogether.
IFAs are in a great position to lead from the front on this issue. Reporting pension loan schemes is fine, but it will not kill off this undesirable market. Forget affordability, it is visibility of good pensions advice that is needed, otherwise it could be IFAs who are guilty by omission of letting pension loan firms and their kind sneak in through the back door.