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Access to pensions reform limited by lack of advisor insurance cover

Experts are warning that a lack of insurance cover for financial advisors guiding pensioners through the options available to them could prevent pensions reforms from being fully effective.12 Mar 2018

Keith Richards, chief executive of independent financial advisors' group the Personal Finance Society (PFS), said some professional indemnity insurers were no longer providing cover for advisors providing pension transfer advice.

Speaking to the Financial Times, Richards said pensions freedoms introduced in 2015 were “in great danger of being derailed” if advisors were unable to obtain cover. He said advisors had been declined cover because insurers were reducing their exposure to future defined benefit transfer claims.

The pensions freedoms reforms allow pensioners in defined benefit schemes to move their savings into personal pensions. However those with more than £30,000 of savings must obtain advice to do so.

Pensions expert Ben Fairhead of Pinsent Masons, the law firm behind Out-Law.com, said the reluctance of insurers to provide cover could be linked to recent claims made in a House of Commons Work and Pensions Committee report about advice given to members of the British Steel pension scheme. The select committee said members were targeted by rogue financial advisors when the scheme closed last year following restructuring by Tata Steel, and that some had lost thousands of pounds through transferring their funds out of the scheme.

“This is perhaps an unsurprising consequence of what happened recently with Tata Steel employees and with increased recognition that there is an unscrupulous, rogue element in the financial advice market ready to advantage if similar opportunities arise,” said Fairhead. 

“As ever, there is an inherent tension between trying to achieve flexibility with pensions yet, at the same time, guard against the risk of scams – this almost inevitably throws up additional cost that has to be borne somewhere,” said Fairhead.

The PFS said many advisers were dealing with 'insistent clients' who had already decided to access their pension funds and were frustrated to have to pay for advice they did not want. As a result transfers were being transacted against professional advice, leading to the prospect of further misselling scandals.

The group said there was anecdotal evidence that advisers were facing "massive hikes" in premiums and excesses which they would not be able to afford, leaving consumers exposed. 

Last year Financial Conduct Authority (FCA) data showed that the amount of money withdrawn by savers from pension pots had shot up by 173% in the last four years, largely due to the freedom reforms. Meanwhile the Commons Work and Pensions Committee produced a report in December calling for a ban on cold calling and suggesting pensioners needed guidance – or to explicitly refuse help – before they could access their savings.

As well as allowing defined benefit scheme members to transfer their funds, the pensions freedoms reforms give defined contribution scheme members more freedom to access their savings once they turn 55 without facing heavy tax charges or largely having to purchase an annuity to give them an income for life.

The FCA recently published a discussion paper on 'non-workplace' pensions which experts said could be the starting point for regulation of the sector.