Your pension should have a ‘second line of defence’
Pension providers must find out their customers’ health and understanding of issues such as tax, state benefits and scams before giving them personalised risk warnings when they access their pension pots. The Financial Conduct Authority has published its rules on the so-called “second line of defence” detailing the information providers must find out before warning customers of the risks of accessing their pensions using the new freedoms. The rules have been introduced without consultation because “the risk to consumers in this area is great enough for additional protections to be required before the April 2015 changes”. Providers should “encourage” consumers to use the Government’s guidance service Pension Wise or seek regulated advice. However, providers will be required to ask questions based on how the customer wants to access their savings and give appropriate warnings, regardless of whether they have taken guidance or advice. The rules will not apply if an advisor is conducting a transaction on behalf of a client or if the provider has already given risk warnings and believes they are still appropriate. For instance, if a customer says they want to enter drawdown, the provider must decide whether they understand issues such as tax implications, sustainability of income in retirement, charges, debt, the impact on means-tested benefits and scams. If the provider judges a customer is not aware of the implications of their actions then they must give a risk warning. The rules come into force on the same day as pension freedoms, April 6, and will apply to firms running personal or stakeholder pensions and selling pension decumulation (process of converting pension savings into retirement income) products, as well as execution-only business.