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Unlocking pensions: a mis-selling scandal waiting to happen

Plans to raise the minimum pension age will make releasing cash a tempting option - advisers beware, says Carl Melving of Affluent Financial Planning.

Proposals to increase the minimum pension age from 50 to 55 years old in April 2010 has unleashed the potential for mis-selling. A pension scandal may develop as a result of the impact this change will have on pension unlocking. And the Financial Services Authority (FSA) does not seem to have anticipated this potential problem.

Potential pension problem

A number of factors have coalesced to create an environment in which consumers could face a new pension problem. Consider the following issues:

  • People are under financial pressure and are trying to cope with paying mortgages, credit card debts and personal loans.
  • We are in the grip of an economic recession and asset values have fallen sharply in the past two years. People’s money purchase pension funds have decreased in value.
  • People are concerned about job security and many have lost their jobs. Many more will follow.
  • Pensions are boring and a long-term issue – people do not understand them.
  • There is a deadline in place: people in their early 50s can get cash from their pension but only in the five-month window remaining.
  • Pension providers love a ‘buy now while stocks last’ marketing opportunity. 

It is conceivable that pension providers and advisers may seize this opportunity to persuade pension holders to unlock cash from their pension while they still can.

Although it is important that consumers are informed about relevant changes, the cash-desperate target audience for such a message presents significant compliance risks. 

A bad idea to unlock

Pension unlocking is rarely a good idea for pension investors and the Financial Services Authority (FSA) and professional indemnity insurers consider it to be a high-risk activity.

The FSA said in 2003: ‘Releasing cash may sound very tempting but you need to stop and think about whether you really need to do it. It is rarely in anyone’s long-term financial interests.

‘Only in exceptional cases, where you have immediate needs and no other option, should you even consider doing it.

‘It’s an expensive way to free up extra cash and, in addition, your financial adviser may well take a fee for dealing with it, meaning that part of your hard-earned pension pot will benefit him rather than you! It will affect your income and retirement for the rest of your life – there are likely to be better ways to address any short-term cash needs so think very carefully about it.’

Pension unlocking is complex and a high degree of skill is required to conduct such business in a way that satisfies compliance. Do not be tempted to pursue such business without fully considering the compliance issues; get approval from your professional indemnity insurer and make sure your client file is highly detailed.

Advisers who take a responsible position will avoid the fallout of any mis-selling that may arise from this pension opportunity once the problems arise in the future.

Carl Melvin is managing director of Affluent Financial Planning

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