The impact of means-testing on people saving in personal accounts might have been ‘underestimated', leading to potential 'mis-selling', warns the Association of Consulting Actuaries.
In its nine-page response to the white paper consultation: ‘Personal Accounts: a new way to save’, the ACA points out some employees - specifically lower paid women now aged 45 to 60 and men aged 50 to 65 - would be “very unlikely to build up sufficient benefits” in personal accounts to offset the Pension Credit they would lose as a result of saving.
And although it admits the government touched on this issue in a part of the white paper, the ACA says “we suspect the impact has been underestimated”, and as a result it says this issue will need to be “carefully monitored on a year by year basis as State benefits are revised otherwise ‘mis-selling’ may occur”.
In its response it notes there is a growing concern “there has been some pensions mis-selling of stakeholder pension contracts because vulnerable groups of the lower paid were left with the complex decision tree device as ‘best advice’”.
The ACA adds: “While there were suggestions individuals should refer to IFAs, it is unlikely this was effective due to the cost of providing such advice and the complexity of SMTAs.”
As a result the organisation is recommending the government should provide “a fairly straightforward comparison of an individual’s personal account and the State Means Tested Assistance (SMTA)” as it believes this “would provide a useful guide to the likely interaction of SMTA with the personal accounts for this vulnerable group”.
Meanwhile the response to the consultation, which closed on 20 March, shows although the ACA agrees a contribution limit should be in place for the new system, it argues the maximum level should be £3,000 a year, rather than the £5,000 proposed in the white paper to allow members to make additional contributions.
The organisation also raises the issue of the volatility of investment returns and annuity rates, as it argues depending on the period when contributions are invested and the strategy adopted, the funds available at retirement can vary considerably within DC schemes.
It points out while investment strategies such as “life-styling” - the use of less volatile investments as the member approaches retirement - can reduce the variation, not all members will choose investment options which reduce investment volatility.
The ACA warns variations in fund values of 30% to 40% or more for the same level of contributions are not unusual, while annuity rates also vary over time and between different providers by as much as 10%.
Charles young, chairman of the ACA pension schemes committee, says the potential for unpleasant surprises for individuals and disappointment of expectations is a significant risk for all DC schemes.
But he warns: “The larger the funds involved the greater the significance of these risks. We are concerned that, with the maximum contribution limits suggested, some members will be investing substantial proportions of their income, potentially in excess of 10%, into personal accounts with insufficient advice.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7034 2681 or email [email protected]IFAonline
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