Fine for 'pension unlocking' firm

A FINANCIAL firm has been fined £150,000 for wrongly encouraging 1,100 people to unlock money early from their pensions. The Financial Services Authority accused Read Independent Financial Advisers, established in 1990, of serious defects in its sales process, inadequate familiarity with regulatory requirements and failure to include adequate risk warnings in its financial promotions. The breaches were made between September 2000 and January 2003.

The fine is the third of its kind imposed on an IFA firm this year. In February 2004, adviser Berkeley Jacobs Financial Services was fined £175,000 and in October, Sesame was fined £250,000 for similar breaches.

The fines are the result of a campaign by the FSA to target firms that do not have the 'best interests of consumers when advising on pensions unlocking'.

'To 'unlock' money from a pension is a very serious decision for a consumer and it is absolutely crucial that firms make sure customers are clear on the risks involved,' said Andrew Procter, FSA director of enforcement.

'If consumers unlock their pensions early they will have less money to live on when they retire, making these products suitable only for a very limited number of people and circumstances.

'Read did not find out enough about its customers' financial circumstances or needs to be sure that it was recommending a suitable product to vulnerable consumers, many of whom were nearing retirement age.

The FSA ruled that Read:

Failed to obtain information through its fact-finding questionnaire about customers' available assets, disposable income and income requirements. Therefore it did not have sufficient information to ensure any recommendations on pensions unlocking were suitable.

Failed to include any warnings about the risks of pensions unlocking in its financial promotions until June 2002 and made 'inappropriate statements' in its promotions about the benefits of these products between May and October 2002.

Failed to ensure that its employees had adequate and up-to-date knowledge of the relevant regulatory rules.

Gave advice concerning only pensions unlocking rather than advising on a range of options.

Failed to clearly display charges.

However, the FSA added that it recognised the steps that Read, which is based in Buckinghamshire, has since taken to improve its sales process. Read, owned by AWD, a financial advice group floated on the German stock market, is also attempting to identify and compensate all customers who may have been wrongly advised.

A Read IFA spokesman insisted the firm was 'totally committed to complying with all FSA regulations' and that this case had been a 'genuine misunderstanding' regarding a letter from the watchdog. The company thought the FSA had approved its procedures.

A brief guide to pension unlocking

What is pension unlocking?

When you retire, you can take around a quarter of your pension pot as a tax-free lump sum and the rest as an income. 'Pension unlocking' is a ruse of getting at the tax-free cash early rather than waiting until you retire.

You must be 50 or over, and it can be done only from a personal pension. If you are in a company pension, you would have to use the benefits built up in your company scheme to buy a personal pension or take what is known as a Section 32 buyout - and this commission pays a whacking great sum to the salesmen.

From here you can take your tax-free lump sum and an income for life - known as an annuity. Or you can use a process called income drawdown, which allows you to take the lump sum and makes you take at least 3% a year income directly from your pension. You can carry on working as before and contribute to a new pension.

Is it a good idea?

Absolutely not. Robert Reid, from independent financial adviser Syndaxi Financial Planning, says: 'The initial satisfaction someone gets from their tax-free cash lump sum will soon vanish when its impact on their retirement income over the long term becomes apparent.'

Iain Oliver, head of pensions development at Norwich Union, says: 'It is not in your long-term interest to unlock cash. One exception can be if your life expectancy is very short.'

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