The Telegraph on Saturday had an article that made me wonder just how shallow some people’s thought processes are. The original article is here, but for the TL:DR people, (Too Long: Did not Read), the thumbnail summary is:
Various people are complaining that IFAs will not help them to transfer their final salary money
The law requires those with £30,000 or more in “protected benefits” to seek professional advice.
The two examples quoted by the Telegraph had different levels of wealth with the poorest example only having £100,000 and had only been told “No”, and the richer with £500,000 complaining only of delays.
The first example, Richard Austin, has a state pension and a final salary scheme worth £100,000 or £5,000 per annum. He lives on a narrow boat and says that his State pension is enough for his needs, that he has some additional savings and is willing to work part time. He also says that if he dies tomorrow his boys will get nothing and he is willing to give up any guarantees to get more control over his money.
My thought processes go like this; Mr. Austin is 65 now and with average luck will get to 84 years old or possibly older. No one, unless you are Mystic Meg has a clear idea of the future and even minor ill health will prevent him continuing his current frugal lifestyle. State pension alone puts him below the poverty line, the £5,000, presumably guaranteed and indexed at CPI, (Consumer Prices Index), gets him to around £13,000 per annum with a degree of indexation to protect from inflation, which is marginally above the poverty line.
If he had the £100,000, would he invest it wisely and ensure that he can pay his way if he lived to almost any age in the future? Past experience is often a good judge of future behavior and this potential client has not made good decisions in the past as his pension is already barely adequate. If he runs out of money, he will, most likely, blame the adviser for his predicament. Add to this that there is no mechanism for a registered financial adviser to pass the advice risk back to the client, it is no wonder no one will act for him!
The richer example, David Rowe, has about £500,000, which could produce a guaranteed income of £12,000, which, on the face of it looks pretty dreadful, (under 2.5%), but we do not know if that includes indexation, a spouse’s pension, any other potential benefits or how the transfer was valued. If he has other assets, no spouse, no debt and an acceptance of investment risk, then a transfer might be advisable, but only a few advisers can act, the cost will be high and the process will be slow, as most pension providers and advisers in the market are backlogged.
As advisers, we took the decision not to be in this market, as we would need to spend a very great deal of money on professional indemnity insurance, although we have staff with the necessary academic qualifications. As a firm, we are not convinced that leaving a final salary scheme is in a client’s interest, as longevity risk, (living longer than you expected), is hard to counter fully with any other product. In time, I would suggest that the dash from final salary schemes and annuities will come back to bite the general public as a whole, either directly, as they, individually, run out of money and indirectly as the State is forced to pay additional benefits to those who have spent their pension pot unwisely. The Australian experience suggests that 25% of retirees with personal pensions will exhaust them by age 70, (see here).
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