Lords claim RDR reforms will widen ‘advice gap’

Peers in the House of Lords have blamed forthcoming financial reforms for worsening an ‘advice gap’ that could leave the poorest stranded at retirement.

Originally posted on Citywire.co.uk by William Robins on Nov 28, 2012 at 11:08

Peers said in a debate last night that the retail distribution review (RDR) reforms, combined with high pension charges, would hurt savers with small pension pots.

The RDR reforms will abolish the payment of commission to financial advisers and require them to hold higher qualifications from the end of this year.

Cross-bench peer Sally Greengross, who led the debate, said the RDR would lead to those on a modest income being priced out of the advice market.

‘There is a big chance that [the poorest] are exactly the set of people who will receive no advice at all, as costs are made transparent and IFAs follow more high net worth clients,’ she said.

‘We must narrow the advice gap. Much more should be done to ensure consumer information is delivered but that must be from a consumer, rather than a compliance, perspective.’

She added that a fragmented government savings policy, split between the work of the Treasury, the Department for Work and Pensions and the FSA, was contributing towards the problem.

Tory peer John Patten added that it was possible for cost-effective investment and advice options to be made available to savers with small pots. ‘We could use the buying power that a million people would have to negotiate for good advice or a better deal when they invest,’ he said.

‘There may be market driven options. They have £2 billion to invest – the market could come up with a process to get a better deal for pensioners.’ Government whip Tina Stowell said the Department for Work and Pensions would consider his idea.

Patten also harshly criticised charges taken from pension pots. ‘These charges have just abolished any chance of getting these rates. People talk about the magic of compound interest but [there is a] tyranny of high charges.’

Labour peer Patricia Hollis added that self-interest among pension providers was also hurting the drive to create a savings culture.

‘I argued for small pots to be transferred to Nest [the National Employment Savings Trust] but this was batted away by the self-interested howls of the industry who would lose money under management,’ she said.  ‘In much the same way they have batted away any early access to a slice of pension savings that would also help transform savings culture.’

‘Many will be left with a portfolio of small pots which will be inaccessible to them at retirement. Those pots have gone AWOL, stolen by the structure of the pension industry we have helped to create.’

Labour peer Lord Lipsey added that the Financial Services Authority had failed to engage politicians in its efforts to reform financial services with the RDR.

‘I did not get a briefing from the FSA – this is extremely neglectful. It’s the FSA’s RDR that’s created the advice gap. Surely those here have a right to hear from the FSA. I don’t know whether this is FSA incompetence or FSA contempt of Parliament.’

Lipsey, who is the president of the Society of Later Life Advisers, said it would be wrong to assume advisers would not write unprofitable business at retirement as ‘winning the trust’ of a pensioner could mean getting other work, such as on inheritance tax issues, later on.

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10 Top Tips From Leading UK Financial Advisors

1.Check your protection

Parents should review their protection policies and consider an income rather than lump sum-based product, according to Colin Last of Tamar IFA

‘As far as protection is concerned, make sure the level and type of protection you have in place is right at any given time,’ he said.

‘If in the past you have been recommended a lump sum policy, which pays out a lump sum on your death, and now you have children, you should review that [policy] and look at doing a family income benefit policy, which is more relevant, because it pays out income for the remainder of the term.’

2. Invest ethically

Helen Tandy, director of the Gaeia Partnership, wants more public awareness of ethical investments, allowing the public to put its principles into financial practice.

Tandy said she would like to see people consider investments that could protect the environment.

‘I don’t think a lot of people realise they can put their ethical views into their investments. If you aim to protect the environment and buy organic products, you can mirror those views with your finances. Do some research on those types of investments.’

3. Stop procrastinating

If Jason Witcombe of Evolve Financial Planning could teach his clients one thing, it would be: ‘Don’t do tomorrow what can be done today, especially when opting into a pension scheme.

‘We all put off tasks that we don’t want to deal with, or don’t know how to deal with, in all aspects of our lives,’ he said. ‘But it’s very easy to put it off for months and wake up a decade later wishing you had done something sooner.

‘I’ve spoken to people who have said they’ve never joined their company pension scheme because they didn’t get around to it when they first joined. But 10 years later they are in the same job and have missed out on years of a company pension.’

4. Buck the bond trend

Investors should pay more attention to equities rather than following the crowd buying bonds, said Jeremy Davis managing director of 35 Finance.

Davis said he had been telling income-seeking clients to decrease their exposure to bonds and increase allocation to equities.

‘Because of fear, people have been buying bonds. Sales of bond funds have been higher than equities for a long time. And yet the next move for interest rates will be up, which is no good for bonds, so the best source of income is equities.

‘The dividend yield on income-producing equities is higher than the yield on bonds. There is potential for capital growth.’

5. Review your financial needs

Keith Churchouse of Chapters Financial would like to see Joe Public review his finances to make sure they are still appropriate, as his circumstances and aims may have changed since he first made an investment or set up a pension.

‘Just like their lives, people’s financial plans do not stand still,’ he said. ‘A pension or investment may not meet the requirements first specified, so always review it in the light of their circumstances if these change.’

6. Not so fantastic plastic

Credit cards are the work of the devil and should be avoided, according to Lee Robertson of  Investment Quorum.

‘Never a borrower be, particularly on plastic,’ he said. ‘They create a false sense of security and the interest rates are frankly scandalous.’

Robertson said people could justify a credit card to get a credit rating, or for emergencies, but should pay it off as soon as they could and not use it on a regular basis.

7. Where’s your pension?

Martin Bamford, Managing Director of Informed Choice wants the general public to understand where their pension is invested.

Bamford said many people chose default investment options for their pension and did not select funds that matched their risk tolerance.

‘It’s important to select funds that match your attitude towards risk and your own individual retirement goals. So, rather than opt for a default option, choose things that suit you,’ he said.

‘We get feedback from clients who go for the default: they’re very disappointed with how it’s performed and feel they don’t have the confidence to put more money into their pension.’

8.Think before you invest

Paul Beasley Managing director of Richmond House Group, wants to teach consumers to take some time to consider their investment choices rather than just do what they are told by an adviser.

He said he also wanted to see people take a greater interest in their investments once these had been made.

‘Don’t rush into any decision, take time to consider it,’ he said.

‘If it’s an investment decision, try to follow it yourself for a short period of time, so you can get a feel for its movement in relation to the market and be a bit more considered before jumping in. It always surprises me how easily some clients just say: “Yes, that’s fine,” and invest.’

9. Avoid debt

Sometimes the simplest lessons are the hardest to learn.

Pete Matthew of Jacksons Wealth Management wants to drum in the importance of people not spending more than they earn.

Matthew said budgeting might be boring, but it was crucial if consumers wanted to avoid falling into debt.

‘It’s a factor for all my clients, either when they’re building wealth and need to spend less than they earn to have saveable income, or when they’re decumulating.’

10. Think long term

People should focus on their long-term goals rather than short-term events when investing, said Steve Buttercase, financial planner with Sense Financial Solutions

He said investors would be better served by concentrating on their ultimate goals and should not be swayed to change course because of unexpected events or brief trends.

‘Nothing will last forever, whether it is good or bad,’ he said. ‘A boom time will end, a recession will end. The hardest thing to do is not respond to the fund or sector of the moment. Make it totally goal-focused and don’t radically change just because of the flavour of the month.’


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Pension Scams you should know about.

Spending time with loved ones

retirement shouldn’t mean money worries

‘It’s been an area that is ripe pickings for fraud,’ said Jane de Lozey, joint head of fraud at the SFO. ‘Pensions are complex and have a mystery to them. People don’t understand them and this leaves them open to abuse.’
GP Noble: ‘smash and grab’ fraud

De Lozey knows all about pension fraud as she worked on the GP Noble case – one of the most high-profile pension fraud cases in recent history. The case started four years ago, and has so far spawned three criminal trials and one civil trial, with another trial due for October. So far £30 million has been recovered from the £52 million GP Noble fraud.

Of the GP Noble fraud, de Lozey said: ‘It was eye-opening to see how easy it is to commit pensions fraud. GP Noble was a smash and grab fraud, the equivalent of ramming into an ATM machine – it showed how easily you can steal other people’s money.

‘The GP Noble fraud is straightforward compared to what we are seeing now. Fraud has been elevated now in terms of complexity.’
New taskforce

It is because of this increased complexity that the SFO is helping to set up a pensions fraud taskforce, working alongside the Department for Work and Pensions, HM Revenue & Customers, the Economic Crime Council, the Department of Business Innovation and Skills, the National Crime Agency, The Pensions Regulator and the Financial Services Authority (FSA).

‘The joint taskforce will specifically target pensions, because we have seen an increase in the number of fraud cases with a pensions angle, and the self-invested personal pension (Sipp) angle has increased a lot in the last year,’ de Lozey said.
Suspect investments

As Sipp savers have control over what they can invest their money in, the fraud often centres on investment. People are encouraged to invest their pension schemes in high-risk investments, many of which promise returns they cannot deliver.

The SFO has seen an increase in overseas property development fraud, with savers encouraged to invest in everything from hotels to golf courses and student accommodation.

Bio-fuel and sustainable energy investments are also being marketed at Sipp investors as a reliable investment for their pension pot.

‘Some of these investment are offering 16% returns – this should set the alarm bells ringing. Also, anything that says income is guaranteed,’ said de Lozey. ‘We see claims that money is guaranteed because it is held in escrow accounts. It is our experience that these claims do not stand up.

‘If something is too good to be true, then that is usually the case.’
Unregulated investments

Many of the investments being pushed to pension savers are unregulated collective investments (Ucis), which are not FSA regulated and are not covered by the Financial Services Compensation Scheme should something go wrong.

Ucis are often based in foreign countries away from the prying eyes of regulators, and de Lozey has straightforward advice: ‘Some jurisdictions are unstable. You have to ask yourself whether you would buy a holiday home there and if not, why would you invest in a rainforest development there? It could be a very costly mistake.’
Unlock at your peril

Pension unlocking, or ‘liberation’, is an area attracting fraudsters. They allow savers to access their pension fund early for a large fee, but fail to explain the tax penalty savers will be hit with in retirement.

‘People are unaware of the [tax] rules. Quite often people who are in financial hardship are targeted [by pension unlocking scams]. They think, “it’s my money so why can’t I have it?” and they are working with an adviser who they think is acting in their best interest, but then they are hit by a tax whammy,’ de Lozey said.

‘People are paying a huge upfront fee [to the pension unlocking company], and then when they get to retirement they take another hit.’

De Lozey has been targeted by pensions unlocking companies through unsolicited texts, and warns people to stay clear of companies that cold call.

She recalled one independent financial adviser who was cold called. He did not tell the company he worked in finance, and they told him if he did not unlock his pension now he would end up owing the pension company money in retirement – a situation that could never happen.

‘The scams we are seeing are highly organised, run by professional people with credibility who have worked in finance and have good contacts. Some of these people are very clever – they may be selling things that sail close to the wind and target unsophisticated investors,’ she said.
Later-life victim

One of the problems with pension fraud is that people are often unaware they are the victim of a scam until they come to retire years down the line, when the fraudsters are long gone.

‘We suspect there are many pension fraud schemes, and many people will be unaware they are victims of crime. They will not know they are victims until 15 years down the line when they try to drawdown their pension and realise their fund has been dissipated,’ de Lozey said.

She added that often victims of fraud feel guilt and embarrassment.
Trust your instincts

The people running pension scams are sophisticated and persuasive, de Lozey warned. Many have a background in financial services and know the jargon.

‘Because pensions are complicated, because there is lots of mystery and jargon, we hand over control and we hand over our money,’ she said. The best advice de Lozey has is to ‘trust your gut’, and if something seems too good to be true then it probably is.

‘Do not be fooled by the suits and flash cars. Do not think of this person as a professional, but as an ordinary person and ask yourself: do you trust them? If we listen to our gut then our instincts do not let us down.’

If you believe you have been targeted by a pension scam contact, Action Fraud.