SimplyBiz chairman Ken Davy has slammed pension minister Guy Opperman for a ‘backward’ announcement that guaranteed annuity rate (GAR) holders with sub-£30,000 pots will no longer need advice.
Davy has attacked the announcement, arguing more than a million less well-off consumers could lose up to £25,000 of value by opting to take GAR pots as cash without advice.
Last week the Government laid down legislation to remove the requirement for advice on pots with GARs.
But Davy is calling for pension providers to be required to give consumers wishing to access GAR pots an advice allowance of £500 to help them with their decision, arguing this will be more than paid for by the windfall providers will receive when GARs are surrendered. Davy says a £30,000 pot with a GAR could be worth £55,000.
Davy says: “This is a backward step which will potentially damage the financial outcomes of over a million less well-off consumers. It completely ignores the fact that at age 65, a £30,000 pension pot with a typical GAR has a real value to an individual of around £55,000. Telling these less well-off consumers that they don’t need to take advice is tantamount to the Government saying it doesn’t care if they end up with worse outcomes.
“Parliamentary under secretary for pensions and financial inclusion Guy Opperman told parliament this proposal will save consumers at least £900 in advice costs, without any explanation of where that figure comes from. Nonetheless, the potential loss to the policyholder could easily be as much as 25 times more than this cost. Conversely, this change will deliver an absolute bonanza for the pensions companies currently sitting on an estimated 1.5 million policies, which include the valuable benefit of a GAR. Many of these policyholders are already disadvantaged by being invested in closed funds or zombie companies.
“Take the example of a fund with a face value at 65 of £30,000, which, because of its GAR, has a real value of £55,000. If the individual opts to take the cash, instead of benefiting from the GAR, the insurer enjoys an immediate windfall profit of the actuarial difference between its face value and the real value. I am not saying that taking the cash will necessarily be wrong, as, without advice and consideration of the client’s circumstances, it is impossible to know. What I am saying is that, as an absolute minimum, the proposed letter from the insurer to the client should alert them to the real actuarial value of the GAR in cash terms.
“Indeed, I would go further and urge the Government to insist that the insurance company provides the client with a voucher of at least £500 to ensure that he or she can be given basic advice on the important options they should consider before simply grabbing the cash. This modest cost for the pension provider will be covered many times over by the windfall profits they will make from clients who choose to ignore the valuable benefit the GAR provides and grab the cash. I believe this is an important issue, which will seriously disadvantage a large number of poorer consumers who need advice if they are to maximise their finances in retirement. This issue needs to be reconsidered by the Government and the FCA without delay.”
Announcing the new measures, Opperman said: “I want everyone to have freedom and choice when it comes to financing their retirement plans and this includes being able to choose whether or not advice is right for them.
“The steps we are taking will empower savers to take control of their options whilst still receiving the right level of information from their providers.
“Financial advice is not a one-size-fits-all industry and I will always be on the side of hard working, responsible savers and anyone looking to have greater choice over their money.”