Advisers could face regulatory repercussions if they fail to warn their income drawdown clients about the potential pitfalls of taking their tax free cash early.
Pension providers say there is a growing trend for consumers to take their pension commencement lump sum (PCLS) - commonly known as tax-free cash- earlier than ever before.
But they are concerned some advisers are selling income drawdown purely on the basis of early access to tax-free cash without properly explaining the pitfalls. Client can currently access the cash at age 50 but this will be increased to 55 in April 2010.
Since A-day, pension income options have become increasingly flexible, with large numbers of consumers now using income drawdown as a way of accessing their PCLS well before retirement, without taking an income until many years later.
However, the FSA has yet to provide specific guidance over what advisers should consider when approaching customers who want to access the PCLS ahead of retirement. Advisers are being urged to fully document their recommendation process in these instances to ensure they protect themselves.
Fiona Tait, business development manager at Scottish Life, says the FSA is likely to update its guidance in the future, and could even launch a thematic review as the practice becomes increasingly popular.
"About three quarters of our income drawdown clients are taking no income, and are presumably using it to access their PCLS while they are still working," she says.
Current FSA guidance on income drawdown assumes clients are using the product to take an income, as well as accessing their tax-free cash, but consumer trends have changed significantly since 2006.
"The pensions switching review was definitely a step in the right direction, but further guidance on how to advise a customer who wants to access their tax-free cash without taking income would help," Tait adds.
Mike Morrison, head of pensions development at AXA Winterthur, says advisers should remind clients of the effect that taking the PCLS will have on the potential future growth of their pension pot and as a result, their final income. Clients should be encouraged to continue making contributions after taking the PCLS, he adds.
"In the credit crunch, there is a good chance some people might take the tax-free cash to tide them over if they get made redundant, but not resuming pension payments when they
get back to work could create problems in the future," he adds.
Tait and Morrison say it is vital advisers give these warning to clients and document then to protect themselves should the FSA start reviewing the practice.
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Advisers and providers gathered at the Grand Connaught Rooms in London on 20 November to celebrate the ingenuity and the graft displayed in the protected product arena throughout the last 12 months. These awards are growing in popularity every year, and our congratulations go to the winners and highly commended.