By Richard Booth, Sedgwick London
Insurers providing professional liability coverage should be aware of certain changes in the way individuals in the UK may use their defined contribution pension savings, as new claims activity may result.
The March 2015 Budget announcement revealed the Chancellor’s intention to take pension reforms even further in 2016, including allowing pensioners who already have taken out annuities to sell the income they receive. Previous reforms announced in 2014 mean that, as of April 2015, individuals reaching 55 are now given the options of:
- Taking a number of smaller lump sums, and in each case 25% of the sum will be tax free.
- “Cashing-in” all of their pension savings for one lump sum.
As the Liberal Democrats’ pensions minister warned last year, the reforms raise the spectre of pensioners blowing their hard earned pension contributions on Lamborghinis, rather than making more prudent investment decisions.
The reforms (those implemented in April 2015 and proposed for 2016) have been welcomed by many commentators for giving individuals more choice in terms of how they spend their savings. The Government has recognized, however, that there are accompanying risks, and the Citizens Advice Bureau will provide individuals with guidance via the “Pension Wise” service. Because the service will not provide advice, many people will consult an Independent Financial Advisor (IFA).
Some IFAs will be expecting new work as a result of the reforms. With a wide variety of investment options available to individuals, and “low risk” products still offering disappointing returns, IFAs will be presenting pensioners with products that offer the potential for higher income and growth, but with higher levels of risk attached. This inevitably will bring further claims activity to the sector relating to the quality of advice provided. It will be a matter of when, rather than if, the first complaints to the Financial Ombudsman Service and claims in the civil courts start to emerge.
The decisions that individuals will need to make in relation to pension contributions will potentially have huge consequences for their retired life. A correspondingly high level of importance will attach to the advice IFAs provide. They must, therefore, ensure that:
- They fully understand the reforms including the potential tax implications for their clients’ specific circumstances.
- They adequately “fact find” their clients; for example, finding out if they require income from their investment or whether their circumstances merit prioritising capital growth.
- They advise on the impact receiving a lump sum payment will have on any entitlements they may need to state benefits.
- They record their recommendations, and rationale for them, in sufficient detail so that complaints and claims can be responded to with contemporaneous evidence.
Professional indemnity insurers should consider whether Proposal Form documentation should include specific questions in relation to what pension advice IFA’s are providing, what percentage of an insured firm’s business is related to pension advice, and what risk management processes and procedures are in place to ensure sound advice and to limit claims.