The new pension freedoms which came in from April 2015 are proving to be quite a challenge in the debt advice world. All those people over 55 with a defined contribution pension can now access their pension savings in various ways. People can now take 25% of the pot as a one-off tax-free lump sum and choose how to invest the rest of the pension pot with no requirement to take out an annuity. This poses the question, should we ever advise people to use their pension to pay back their debts?
The implications for debt advisers need to be given careful thought. In the free debt advice sector, we are authorised by the FCA to offer debt advice to the public, usually under the limited permissions regime. We are not generally authorised to provide financial advice about ‘retail investment products’ such as pensions. We can provide generic guidance about pensions but cannot go any further.
As a result, debt advisers may decide that they are required to refer their clients to independent financial advisers for product-related advice in relation to their pensions. However, many people who are already in debt, and may have smaller pension pots will not be able to afford to pay to access this advice.
We can refer to Pension Wise or The Pensions Advisory Service. However, will people find themselves in a “referrals loop”? This is a concern that here at the Money Advice Trust we have been raising for some time. We can see an unsatisfactory situation where people who approach us for debt help but have a pension are signposted to Pension Wise for pensions guidance and then referred back again for debt advice. This is not a good customer journey for people to follow and we fear that vital information and advice could be lost along the way.
We are also concerned that debt advisers will be required to give advice to people with pension pots that includes the suggestion that the pension be used to pay back creditors. If someone decides to use their pension pot to clear their debts at age 55, how will they feel once it becomes clear that they no longer have a pension to rely on as income in their old age? Such an approach could be seen to undermine the public policy purpose of pension provision.
There are also complicated implications for claiming benefits in the future that need to be thought through, such as where deprivation of capital might be a consideration.
These complex issues throw up some thorny questions for the debt advice sector.
- How do we simplify the customer journey for people seeking complex advice about their pension as part of debt advice to resolve their financial situation?
- Should the FCA look at providing the debt advice sector with more guidance about the parameters of the advice we can provide without inadvertently treading on the perimeter of regulated financial advice?
- Should the Government look at amending the FCA Perimeter Guidance rules to make sure that the right parameters are in place for both debt advisers and regulated financial advisers?
- How should responsible lenders and debt collection agencies react if people approach them to pay off their debts or make offers in full and final settlement using their pension pots?
It is heartening to see that these issues are already receiving significant attention – not least thanks to the work of the Money Advice Liaison Group (MALG) and Nick Lord. We hope that this will lead to robust best practice guidelines for creditors, debt collectors and debt advisers to ensure that we give the best advice we can within our current regulatory boundaries.