Is it a duck or a swan?
I was always taught that if it looks like a duck, quack likes a duck and swims like a duck, the chances are it is a duck, even if an expert tries to convince you it’s a swan! For ‘expert’ substitute ‘politician’, and the likelihood of it being a duck increases ten-fold.
It is no surprise that David Gauke, the newly installed Work and Pensions Secretary, has referred to the Government’s new combined guidance service for consumers, as an ‘advice service’. In reality however, it is guidance, as financial advice has to be regulated by the FCA. Equally, the civil service mandarins at the treasury are very clear about what constitutes regulated advice.
The legacy for the poor consumer is one of continuing confusion and disappointment as their search for advice from the Government’s free service provides them with little more than information. It might spur a consumer to seek advice from a regulated financial adviser, however, it is much more likely that they will end up ‘muddling through’.
When you also consider the shockingly small number of consumers who actually use the current guidance services at around £500 each, it is obvious it would make more sense to set up a voucher service, which consumers could then use to obtain proper advice.
It is also worth noting that the FAMR and the Advice Working Party have missed a real opportunity to end the confusion once and for all. Having done extensive research, they have produced a form of words to try to clarify the difference between guidance and advice. The fundamental problem is that, for the layman, guidance and advice are virtually the same thing and easily confused, as was clearly demonstrated by the new minister. I believe the answer is obvious; we should simply change the description of the service from impartial 'guidance' to one of impartial 'information'. This would bring clarity for consumers, as almost everyone understands the difference between information and advice.
I urge the Government and the FCA to recognise the potential damage to consumer outcomes created by the present confusion. It is time to bring total clarity to the situation by calling the new combined body the "Impartial Financial Information Service" it is. Every consumer will then readily be able to identify which is the duck and which is the swan.
Time to press the reset button on pension freedom
As you are relaxing in holiday sunshine, you may like to reflect that, if your 8 year old has already decided to be a fire engine driver, the decision as to which course to choose at university is still at least 10 years away. Yet, as it stands the pension freedom legislation expects people as young as 55 to make life changing decisions 10 years or more before they retire. In reality, these are nightmare choices, which are almost impossible to get right, so it is no surprise that hardly a day goes by without another warning from the regulator, an insurer, or an adviser, that consumers need to beware of taking stupid decisions. One of the latest is Aviva’s, John Lawson, who rightly complains that they can only watch as customers make bad decisions and suggests that the solution is to change the advice boundary, which he argues prevents them from protecting clients from themselves.
Logical as this sounds, the real issue is not the advice boundary, but the fundamentally flawed structure of the pension freedom legislation. Accessing their pension fund at 55 puts consumers in the invidious position of taking major decisions regarding their circumstances in retirement years before they are mentally prepared to take them. The result is that consumers are accessing their pension cash, based on short-term factors, either without or often ignoring, professional financial advice.
This behaviour inevitably results in bad consumer outcomes, which the regulator is supposed to be duty bound to try to prevent. Frankly, it is ironic in the extreme that the previous Government’s desire for what, in my view, was an ill-considered election gimmick, is directly responsible for creating what is currently one of the FCA’s biggest headaches.
It is very clear to me that we need a radical rethink of the pension freedom rules and that the Chancellor should press the reset button on pension freedom in the Autumn Budget. Quite simply, pension freedoms should be changed so that they apply, not at 55, but rather just prior to normal retirement date. At a stroke, this would eliminate the worst elements of the present consumer detriment. The reality of their looming retirement and its impact on their standard of living would ensure that proper consideration was given to all their pension freedom options, which are virtually impossible for someone to envisage at age 55.
I believe the positive impact of allowing pension freedom to apply a few months before normal retirement would be dramatic, as it would combine all the positive benefits of the new freedoms with the reality check which imminent retirement brings. In addition, assuming actual retirement for most people will be about 10 years later than age 55, it will potentially almost double the size of their pension pot. Now that really is something to reflect on during the holidays!