Over the last few weeks I have been lucky enough to do a number of sessions addressing financial advisers, either at their team meetings or under the guise of the IFP, PFS or IOFS. The hot topic? Without question the proposed Budget changes and the opportunities and possible pitfalls that the new regime might hold.
The general feedback has been positive, with a number of themes coming through, but alongside the positive there have been a number of concerns. One on which most advisers have been in agreement is the need to be wary of how people are encouraged to invest their pension money after reaching the age at which they can release it.
The last couple of years have seen a real growth in stories illustrating poor decision making with regard to the investment of money withdrawn from pensions.
We have seen a significant increase in so-called 'pension liberation fraud', with people being encouraged to take money out of their pension schemes and then invest it elsewhere – often triggering a combination of the tax charge for an unauthorised payment, and high charges that could well leave very little money for the individual trying to liberate the money.
At the same time we have seen a steady flow of information from the FCA on the subject of SIPP investments and, in particular, the issues arising from an alert concerning pension transfers investing into unregulated products through SIPPs (following the new rules on marketing UCIS that were published several months ago).
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There are a few other subjects that I could throw into the mix, like boiler room share deals, landbanks, eco friendly investments etc.
A lot of progress has - and continues to be - made in the fight against pension liberation, but from April next year the goal posts move! As proposed, anyone with a DC pension plan will be able to draw the whole amount from the plan as a taxable withdrawal.
What an opportunity for the 'scammers'. People over the age of 55 will have legitimate access to money (perhaps more than they have ever had before) and could well decide to pursue new investment opportunities - both legitimate and not so. Okay, it will be subject to tax at the consumer's marginal rate, but this is likely to be a minor hurdle.
We are currently starting to consider the design of the new regime and, in particular, the guidance guarantee – it is important that the vulnerability of consumers with little financial education or knowledge is built in to the process. If it is not, then we may be picking up the pieces sooner than we thought.
A starting point could well be to 'guide' people away from most circumstances of taking money out of their pension to invest in something else.
I doubt there are many cases where it would be wise to draw money out of the pension, pay any penalties and, of course, tax – only to then invest it into something else that will also incur costs and could then be subject to tax again.
One important factor could well be the final level of tax on death that we end up with after consultation – at 55% (as it is at the moment) there might be the possibility of putting the money into something else that could save tax on death. Perhaps reducing it to the same rate as an individual's marginal rate could save such arbitrage.