Auto-enrolment poses significant risks to some workers
The big issue for the Government these days is the fact that around half the current workforce is going to end up without any pension savings if things do not change. The strain that would place on future taxpayers to provide means-tested support would probably be painful.
The Government's plan is to get people saving as soon as it can. Unfortunately, it is a bit of a cunning plan in the Baldrick model. It sounds plausible but does not stand close scrutiny.
For millions of people, the real value of any savings they make will be undermined by the way that pension savings interact with means-tested support. Put simply, millions will be taxed for saving.
The FSA's newsletter makes reference to means-tested benefits and advice. The following is an extract: "Factors that impact on the advice you give will vary from product to product and customer to customer. However, one factor you may want to consider taking into account is whether a product will affect a customer's entitlement for means-tested state benefits. Principle 9 imposes a broad requirement for a firm to take reasonable care to ensure the suitability of its advice.
"And principle 7 requires a firm to pay due regard to the information needs of its clients. You may wish to consider the impact of your financial advice on means-tested benefits in communicating with some of your customers.
"Among the failings we have seen in this area are a firm that recommended a low-premium pension to someone in their late 50s with no previous pension provision. Another firm recommended a lifetime mortgage to a customer without considering the impact on the pension credit they were receiving.
"Among the good practice we have seen is a firm that ensures all customers who are in receipt of child and family tax credits are aware of the different implications of achieving capital growth with savings and investments.
"You and your customers may want to look at the information available on the internet on websites such as the DWP and entitledto.com to understand the available benefits and tax credits."
This begs the following questions about the care that will be taken as people are auto-enrolled into pension saving by the legislation the Government is proposing: * Will those auto-enrolled into personal accounts be advised on the impact on their entitlement to means-tested benefits? * Will older people with no previous provision be advised not to save in a personal account? * If so, would it just be people in their 50s or could it be people of, say, 49, 47 or 41? Any indication the Government could give of the exact cut-off age would be helpful.
* Will the DWP use its knowledge of the National Insurance histories of those swept into saving by auto-enrolment to help people understand their position with regard to the available benefits and tax credits?
It seems to me that the average client of a financial adviser is less likely to need to understand the effect that saving could have on their entitlement to means-tested support than the average person for whom personal accounts are intended. The fact that this is important enough to be brought to the attention of financial advisers by the regulator indicates that it will surely be even more important for the DWP to take great care when distributing personal accounts to its target market of people on low to medium levels of income.
If the Government cannot give assurances to those about to be swept into pension saving that the same level of care will be taken in regard to the suitability issues that are required of financial advisers, perhaps people should be wary about getting caught up in the scheme.
First published in Money Marketing, 15 February 2007