The ‘Pensions & Debt Advice – Bridging the Advice Gap’ report was a joint project between Money Advice Scotland and the Money Advice Liaison Group (MALG) and funded by the Money Advice Service, launched in October 2017.
The impact of Pension Freedom and auto enrolment on the amount of money people have available to repay their debts is explored in forensic detail by report author Nick Lord, who has more than 30 years experience in money advice and works with a range of commercial and not-for-profit advice organisations:
“If you decide to take money out of your pension to clear your debts now you won’t have that money available to give you a better income when you retire. If you worry about your debts and that makes you ill then taking money out of your pension makes sense. Saving through auto-enrolment means less money to repay debts. We need clarity around when people can save into a pension rather than repaying debt and when pension saving is to be ignored by lenders and debt collectors negotiating debt repayments. It’s complex, confusing and people need better advice and guidance. Advisers need to make sure not to step over the boundaries between giving debt advice and guiding people making pension decisions.”
The report was launched and next steps discussed at an event at the Money Advice Service, which was also streamed live for anyone interested to watch via the Money Advice Service youtube channel:
Craig Simmons Head of Debt Advice at the Money Advice Services said:
“It’s crucial that people get good advice when they present with debt problems along with pension considerations. This report highlights that, at present, this isn’t as straight forward as it could be for a lot of consumers and I thank Money Advice Liaison Group, Money Advice Scotland and Nick Lord for shining a light on this topic. The Money Advice Service, and the broader sector, should reflect on the report and consider how we can make advice as holistic and joined up as possible.”
In summary, the challenge highlighted in the report is:
- More clients and customers are able to access their pension savings after age 55
- More clients and customers will be automatically enrolled into a pension with increasing contributions
- At the same time, the level of individual and household debt continues to rise
- Therefore, more clients and customers will consider using their pension savings to repay debt or question how to allocate their income between repaying debt and contributing to pension savings
- Making an informed decision on whether to access the pension or contribute more to pension savings requires that the client/customer considers an often-complex interaction of various financial and personal factors
- Best practice and interpretation of FCA (Financial Conduct Authority) rules require that providers of debt advice take account of these new pension options when advising their clients or customers
- But most providers of debt advice are not authorised by the FCA to give advice on pensions, and existing information and guidance on pensions is likely to be insufficient to enable consumers with debt problems to make an informed decision
- FCA rules also imply or require that credit companies, mortgage lenders, and debt collection companies take account of the impact of Pension Freedom and automatic enrolment when discussing and determining affordability in debt collection and requests for new borrowing.
Example case study:
Mr Adams is 55 and single. He has no dependents. He earns £22,000 a year but is in poor health and fears that he may be forced to give up work well before his state pension age of 67. He lives in local authority rented accommodation. He has credit card debt of £35,000 which he is struggling to pay given the minimum repayment of £850 per month. He has a defined contribution pension with a current value of £50,000. He seeks advice about the advantages and disadvantages of using Pension Freedom to repay his debt.
Mrs Brown is 55 and married. She earns £22,000 a year and hopes and expects that she will continue working for as long as she wants. She lives with her husband in local authority rented accommodation. Her husband, who is 58, has a long-standing defined benefit pension which is projected to pay him a lifelong index-linked pension of £12,000 a year from age 60 plus a tax-free lump sum of £36,000. Mrs Brown has credit card debt of £35,000 which she is struggling to pay given the minimum repayments of £850 per month. She has a defined contribution pension with a current value of £50,000. She seeks advice about the advantages and disadvantages of using Pension Freedom to repay her debt.
Before Pension Freedom, the normal debt advice approach in both cases would have been to ask the credit card companies to accept payments based on the ability to pay of Mr Adams and Mrs Brown plus a freezing or reduction in interest payments.
Download the full ‘Debt & Pensions Advice – Bridging the Advice Gap’ report. Also see MALG invites comments and discussion around ‘Debt & Pensions Advice – Bridging the Advice Gap’ report to contribute your comments.