Pension misselling is expected to become the next big financial scandal with insurers and advisers taking a hit of billions of pounds.
The industry estimates retirement savers could claim compensation of at least £6 billion against firms who have given poor advice.
Regulators estimate around 30,000 people a year – a third of pension transfers each year – are based on bad advice.
Normally, a client would stake a claim against their financial adviser who would have professional indemnity cover, but insurers are pulling the plug on policies as they fear the extent of the problem.
The scope of the problem is huge. A retirement saver could have a fund worth up to £1 million, which would wipe out many smaller financial advice firms if a claim was found in the client’s favour.
No cover for claims
But savers may not realise that their adviser either has no professional indemnity cover or a token amount to deal with losses of up to £50,000.
The average pension transfer is around £215,000, says regulator the Financial Conduct Authority.
And the FCA believes pensions worth around £42 billion were transferred in the past 12 months.
Steve Ray, a director of professional indemnity at insurance broker Howden, said: “Insurers’ analysis is that pension transfer claims will cost an enormous amount very quickly.
“Many advisers are calling us late in the day seeking coverage, sleepwalking into what will be a problem. Small advisers are going from doing two pension transfers a year to 1,000. That is not something the insurance market should help advisers do; some are just trying to take a fee hoping everything doesn’t go wrong.”
Pension freedoms blamed
Besides insurance claims, disgruntled clients can complain about advice to the Financial Ombudsman or Financial Services Compensation Scheme.
But the ombudsman can only award up to £150,000, while the FSCS is limited to a cap of £50,000 and that’s only if the adviser is no longer in business.
Advisers blame the problem on the government’s pension freedoms. The freedoms make switching pensions worthwhile for workers willing to give up guaranteed retirement income for earlier access to their cash.
Keith Richards, CEO of the Personal Finance Society, said: “The retirement landscape continues to evolve with professional advice playing a crucial role in meeting consumer financial planning needs.
“The pace of change has led to some areas of concern and unintended consequences for consumers, especially those entering draw-down without having consulted a professional adviser or Pension Wise guidance. The recent high-profile British Steel fiasco has also thrown into question adviser conflicts of interest for DB transfers, now impacting professional indemnity insurer confidence.”
