Final decision DRN0516277 Roy Milne ombudsman

K821x#14

complaint

Mr N has complained about advice received from A.J. Wealth Management Limited (formerly AJ Financial Services Limited hereafter referred to as AJ Wealth) and the on-going management of his pension. He has raised concerns as follows:

AJ Wealth provided advice on his pensions before he stopped working. His SIPP fund represented all of his non-state pension provision and the agreed investment policy was ‘conservative’.

AJ Wealth recommended the SIPP and arranged for income to be taken from it but failed to advise him of the high level of risk in taking the maximum income allowed.

AJ Wealth recommended, in September 2011, that he move to a higher risk investment strategy. It had been aware of the decline in his fund value before that but did not advise how to protect / mitigate against this. This would have included reducing his income level.

After an incorrect SIPP valuation was issued AJ Wealth complained to the pension provider and accepted an offer of compensation from it without either Mr N’s consent or instruction to do so. As a result he was without income for several months until he took steps to facilitate this.

background

I issued my second provisional decision on 27 January 2015, a copy of which is attached to and forms part of this decision. There has been further correspondence since then that I have summarised below.

AJ Wealth’s representatives told us:

The fact find recorded that Mr N and his wife had assets in excess of £1.25 million; they were both expecting large inheritances and he would continue to provide consultancy services following retirement. Mr N declined to provide information about his liabilities but confirmed that his income exceeded his outgoings. I failed to acknowledge Mr N’s role in all of this even though FSMA (s 5 (2) (d)) expects consumers to “take responsibility for their own decision”.

The finding that inadequate warnings were provided based on the PIA guidance is flawed because the FSA was the regulator at the relevant time. In any event adequate warnings were provided.

There is no basis for a finding that AJW recommended that Mr N take the maximum level of income. Documents clearly evidence that Mr N instructed AJW to this effect and AJW advised him of the risks.

AJ Wealth’s representatives also made submissions on the issue of causation. That is whether any advice caused Mr N to suffer a loss. They said that the conclusion that Mr N would have bought an annuity is based on his self-serving comments as the evidence from his new IFA shows that:

His objectives and preference for flexibility have remained constant; even after a lengthy discussion about the features, benefits and implications of remaining in an income drawdown he has chosen not to buy an annuity:

“Throughout all the face to face meetings that we have had, [Mr N] has consistently explained that he feels uncomfortable with losing the flexibility that he currently

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enjoys with the income drawdown, and that he does not want to give all his pension money to an insurance company never to be seen again.”

Business B explained to him that if he were to do nothing “the gross level of income received from the existing arrangement [would] be less than the quoted level annuity with no benefits on [his] next review on 14 July 2014” so there is no reasonable basis for him to defer purchasing an annuity until resolution of the complaint.

Standard Life explained to him that he required an IFA to effect a fund switch and Business B had informed him that he could give them authority to effect a fund switch. Yet he has not arranged for the fund switch despite having been informed that MPS5 was “above [his] stated risk tolerance” – and this is highly relevant.

Recordings of telephone calls between Standard Life and Mr N were sent to AJ Wealth’s representatives. They replied again emphasising that Mr N’s actions show he never intended to or has no intention of buying an annuity – which are relevant to the issue of causation and breach of duty. They point out that the calls reveal Mr N was seeking to obtain advice/information from Standard Life about his income drawdown. And he enquired about expected returns if he remained invested in the MPS5 fund. They say this shows he is clearly interested in remaining invested in the same fund with the same arrangement.

AJ Wealth’s representatives have also said that the provisional decision is prejudiced against income drawdown. That is an outdated perspective in view of recent reforms and widespread criticism of annuities.

my findings

I have considered all the available evidence and arguments to decide what is fair and reasonable in the circumstances of this complaint. Having done so, I have come to the same conclusions as I reached in the attached provisional decision and for similar reasons.

Suitability of the advice

I still think that the advice given to Mr N in 2006 was unsuitable for him. He was advised to use income drawdown and was taking the maximum income allowed. I referred to a regulatory update issued by the Personal Investment Authority (PIA). The regulator at the time of advice in 2006 was the Financial Services Authority. I am sorry that I did not make this point clear in my provisional decision. But, the warnings required by the PIA still applied in 2006. Those warnings were not given to Mr N.

It is true that Mr N asked for the maximum income. However, AJ Wealth was required to give suitable advice. The records of the risk Mr N was prepared to take are in dispute. It was initially recorded as a combination of modest and relatively higher risk funds. That has been amended and in 2009 he moved to a low to medium risk strategy. He subsequent move to a higher risk strategy in 2011 was to try to recover his losses.

The pension funds were a large part of Mr N’s retirement income. If his income dropped significantly that would have a big impact on his standard of living. I think that he could not afford to take much risk with his pension fund.

By taking the maximum amount of income Mr N reduced the capital in his pension fund. I think that AJ Wealth should have advised against this. There are file notes written by AJ Wealth after meetings with Mr N that he had been advised not to take the maximum

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income. But, that was not followed up in writing. Mr N says that he was not advised against taking the maximum income allowed. No direct reference was made to that in the initial advice to Mr N. I am not satisfied from the available evidence that AJ Wealth gave that advice.

Mr N did want flexibility and was keen to preserve the benefit of the pension fund in the event of his death. Using income drawdown could have been suitable, if he had taken less income. But, I think that Mr N was not in a position to take much risk with the income he would have in retirement. He had loans that needed to be repaid and this was his main source of income. I think that suitable advice would have been to buy an annuity.

Mr N’s responsibility

Mr N should take responsibility for his own decisions. But, he approached AJ Wealth for advice. He was relying on their expertise. There were regulations in place that AJ Wealth had to know its client and give suitable advice. Mr N had outstanding loans that should have changed the advice. I think it was important for the adviser to ask the right questions to know what Mr N’s circumstances were before giving him advice. AJ Wealth says that it asked Mr N about his personal financial position. It is not clear why the full details were not discovered. AJ Wealth should have explained why the information was needed and pressed the point. I think that Mr N would then have said that he had the loans.

Mr N acted on the advice he was given. I think that it was reasonable for him to do that.

Causation

AJ Wealth’s representatives say that Mr N would not have bought an annuity even if he had been given that advice. This is a fair point and one that I have given a lot of thought. Mr N has told us that if he had been given advice to buy an annuity that he would have done that. I have to bear in mind that Mr N will gain by saying that. And so I treat that evidence with some caution.

Mr N has recently been advised to buy an annuity. That was after being given a comprehensive explanation of the different options available. But, Mr N has not yet bought an annuity. Part of the reason given was that Mr N still wanted the flexibility of income drawdown and the benefits if he dies.

I have carefully reviewed all of the evidence about the advice Mr N has been given by his new adviser. It is clear that Mr N still likes the benefits of using income drawdown. But, part of the reason given for not buying an annuity now is that annuity rates are low and that he is hoping that the fund will recover.

I cannot be certain what Mr N would have done, if he had been given suitable advice in 2006. I usually take the approach that a consumer would act on the advice they were given. Mr N says that he would have bought an annuity. But, Mr N did not buy an annuity when he was recently given suitable advice to do so. I have to take account of that in reaching my decision.

I think that the large fall in the fund value and drop in annuity rates has been a big factor in Mr N’s recent decision not to buy an annuity. The income he could get now is about half of the annuity he could have bought in 2006. The damage has been done and I think that has been a big factor in Mr N’s recent decision.

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My conclusion is that if Mr N had been given suitable advice to buy an annuity in 2006 that he would have bought an annuity.

Mr N’s calls to pension provider

I have listened to the recordings of calls Mr N made to his pension provider. It is clear to me that Mr N was trying to understand the issues involved. This is the impression I have formed about Mr N during our investigation of his complaint. If he is asked questions he wants to know why those are relevant. I think that Mr N needs advice about his best options. The call handler at the pension provider explained that he could not give advice. The calls reinforce my opinion that Mr N is cautious and that he really should have been advised to buy an annuity.

Investment strategy

The investment strategy was changed to a higher risk strategy following advice from AJ Wealth. That was in an attempt to recover some of the losses Mr N had suffered. I think that was unsuitable.

Mr N has tried to change the strategy, but needs a financial adviser to do so. After receiving the advice from Business B he has told us that he can no longer afford to pay for more financial advice. He has not appointed another adviser. I do not agree that Mr N wants to remain in the higher risk fund. Although he has stayed in that fund, I am satisfied that is because of the cost of receiving new advice.

Fair compensation

My aim is to put Mr N back in the position he would now be in if he had bought an annuity in 2006. I explained how the compensation was to be calculated in my provisional decision. The compensation will be calculated assuming that Mr N could have bought an annuity of £13,789 a year. That was level in payment with a pension for his wife of 2/3rds of that amount if Mr N dies before her.

AJ Wealth’s representatives did not agree that the extra income Mr N received for the first five years should be ignored. I have considered that point, but still think that Mr N has spent that money. The capital in his pension fund has been reduced. That is because of the advice that I have found to be unsuitable. The income Mr N could now obtain is therefore lower. I think it is right that the income should not be taken into account in the calculation of loss.

Initially, I had considered ignoring 50% of the income that Mr N had received. That was because I thought he had spent the additional income, but he received some financial benefit by making the mortgage payments. Mr N continued making mortgage payments and sold his home. He later moved to a smaller property.

Mr N’s mortgage was interest only. He did not repay any part of the capital from the mortgage payments. He was able to keep his home for longer and therefore received a benefit from living in a larger house. But, I have to think about whether that gave him any lasting financial benefit.

It is possible that Mr N made a financial gain as a result of keeping his home for longer and possibly selling at a higher price. But, it is not possible to say when that sale would have

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happened or what the sale price would have been, or the price of the new house. Mr N did move twice and incurred additional costs. Overall, I am not satisfied that Mr N received any financial benefit from taking more income than he could have received from an annuity.

The approach set out on our website for calculating compensation is for a standard case. I think that Mr N has spent the capital from his pension as a result of acting on advice from AJ Wealth. That income has been spent on ephemera and there is no lasting financial benefit. I do not think that he should have his future income reduced as a result. I think it is fair, in the circumstances of this complaint, if the additional income paid from 2006 to 2011 is ignored.

The advice given in 2005 meant that Mr N lost the value of the guaranteed annuity rates on some policies. He also incurred additional charges. But, I explained that the SIPP was likely to have increased in value because of the fund performance. Because it would be difficult to establish what loss, if any, had been caused I decided that I would not investigate the advice from 2005 any further. The calculation of Mr N’s loss should start with the values when he acted on the advice to use income drawdown in 2006.

I think that the distress and inconvenience caused by AJ Wealth’s advice has been significant. Mr N has had to rearrange his finances and his income has been significantly reduced since 2011.

Mr N did not act on the advice that he has received from a different adviser. But, he paid for that advice and would not have done, if he had been suitably advised by AJ Wealth. I think that AJ Wealth should compensate Mr N for the cost of that advice.

AJ Wealth should make the following calculation.

1. Determine the current transfer value of Mr N’s SIPP.2. Calculate the amount of income Mr N has received from his SIPP.3. Obtain the values of Mr N's SIPP in 2006.4. Obtain the rate payable to Mr N on the open market in July 2006 for a level

annuity with 2/3rds spouse’s pension guaranteed for 5 years.5. Calculate the income Mr N would have received from the annuities set out in

4 above.

We have calculated that Mr N could have obtained an annuity of about £13,789 a year in 2006. Neither party has objected to that figure. Steps 3 and 4 should therefore be taken as producing an annuity income of £13,789 a year.

The additional income received between 2006 and 2011 should be ignored for the purposes of this calculation. After his income level was reviewed in 2011 Mr N’s income has been lower than £13,789. This difference should be paid to Mr N as a lump sum.

6. AJ Wealth should then determine the annuity that would now be paid to Mr N on the same basis as before but taking into account the current fund available. If this annuity is lower than the total annuity income Mr N could have received in 2006 (£13,789) then A J Wealth should pay for the cost of buying an additional annuity for the difference. If this is not practical A J Wealth should pay Mr N the capitalised value of that additional income - less a deduction for his marginal rate of tax, which I assume to be basic rate tax of 20%.

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I also consider that Mr N has suffered significant distress and inconvenience as a result of the advice he received. He did not receive any income for some time and has moved house twice. Mr N is very likely to have needed to make adjustments to his lifestyle once he ceased working but the recommendation to enter into income drawdown has exacerbated the distress caused. I therefore remain of the view that an award for distress and inconvenience is appropriate in this case. I award £500 for the distress and inconvenience caused.

Mr N has presented us with a copy of the invoice raised by business B for the advice he was given in 2012 of £1,554. He would not have had to pay for that advice if he had been advised to buy an annuity. I think that the cost of advice is reasonable and make an award for the full cost of that advice. Simple interest is to be added to that amount at a rate of 8% gross a year from the date Mr N paid the fee until the date AJ Wealth pays the award.

my final decision

Where I uphold a complaint, I can make a money award requiring a financial business to pay compensation of up to £150,000, plus any interest and/or costs that I consider appropriate. If I consider that fair compensation exceeds £150,000, I may recommend the business to pay the balance.

determination and award: I uphold the complaint. I consider that fair compensation should be calculated as set out above. My decision is that A.J. Wealth Management Limited should pay Mr N the amount produced by that calculation – up to a maximum of £150,000 (including distress and/or inconvenience but excluding costs) plus any interest set out above.

A.J. Wealth Management Limited should provide details of its calculation to Mr N in a clear, simple format.

recommendation: If the amount produced by the calculation of fair compensation exceeds £150,000, I recommend that A.J. Wealth Management Limited pays Mr N the balance plus any interest on the balance as set out above.

This recommendation is not part of my determination or award. It does not bind A.J. Wealth Management Limited. It is unlikely that Mr N can accept my decision and go to court to ask for the balance. Mr N may want to consider getting independent legal advice before deciding whether to accept this decision.

Under the rules of the Financial Ombudsman Service, I am required to ask Mr N to accept or reject my decision before 22 June 2015.

Roy Milneombudsman

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Further Provisional Decision copy

complaint

Mr N has complained about advice received from A.J. Wealth Management Limited (formerly AJ Financial Services Limited hereafter referred to as AJ Wealth) and the on-going management of his pension. He has raised concerns as follows:

- AJ Wealth provided advice on his pensions before he stopped working. His SIPP fund represented all of his non-state pension provision and the agreed investment policy was‘conservative’.

- AJ Wealth recommended the SIPP and arranged for income to be taken from it but failed to advise him of the high level of risk in taking the maximum income allowed.

- AJ Wealth recommended, in September 2011, that he move to a higher risk investment strategy. It had been aware of the decline in his fund value before that but did not advise how to protect / mitigate against this. This would have included reducing his income level.

- After an incorrect SIPP valuation was issued AJ Wealth complained to the pension provider and accepted an offer of compensation from it without either Mr N’s consent or instruction to do so. As a result he was without income for several months until he took steps to facilitate this.

background to the complaint

SIPP transfer advice

Mr N met with AJ Wealth’s adviser in March 2005. A fact find recorded that meeting. It was noted that Mr N wanted advice on his pensions as he had a number of policies which had not been reviewed for some time. Although he had not yet reached state pension age he was considering retiring within a year of the meeting. It was noted that Mr N intended to continue to do some work for his employer after his retirement.

Mr N was at the time married and in good health. His annual earnings were recorded as £34,000 and a further £10,000 rental income is noted. No breakdown of outgoings was provided but there is a note saying that Mr N had confirmed that his income exceeded his expenditure.

Mr N was recorded as owning his own home outright. No loans or debts were recorded. Mr N’s objectives were recorded as being:

- To consolidate his existing pension policies.- To invest the resulting pension fund in a diversified investment strategy with the

potential for longer term capital growth.- To have a structure that meant he did not have to purchase an annuity ‘as he is not keen

on annuities’... [Mr N] has looked at SIPP.’

Mr N wanted his pension to provide for any dependants should he predecease them.

Mr N had four non-protected rights pension policies. He was not making contributions to any of the policies at the time of advice. He was informed that two of his existing policies had guaranteed annuity rates (GARs). AJ Wealth said that its adviser told Mr N about them and also provided him with details of the then current annuity rates by way of comparison. However, Mr N ‘confirmed it was not his intention to purchase an annuity but to move into income drawdown even though there are inherent risks and income levels could fall or the capital value of his pension could be eroded.’

AJ Wealth said that using the guarantees would mean an annuity had to be purchased which would not have met Mr N’s objectives. The rates applicable were higher than the current annuity rate (shown as 7.15%) available at age 65. However, Mr N did not intend to take benefits at 65 and therefore he was advised to transfer the policies containing GARs to the SIPP.

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In April 2005 a pension report was prepared for Mr N. This set out the details of his existing pension policies.

1. a stakeholder policy

Fund and transfer value approximately £180,000.This was invested in gilt & fixed interest and UK equity funds all of which were recorded as having had poor performance.The policy did not contain any guaranteed annuity rates.

2. Retirement Annuity Contracts (RAC)

Mr N had three policies with values of about £20,000, £11,000 and £40,000 respectively. The larger policies provided either a GAR or a guaranteed pension at age 65 on a single life, non-guaranteed basis. The smallest policy provided the option to take benefits at an earlier date and on a different basis.

All three policies were to a greater or lesser extent invested in with-profits about which the business remarked ‘It is certain that With Profits funds do not offer attractive returns in the short term but also that there was concern going forwards in the longer term…’

A SIPP was recommended to enable Mr N to benefit (after legislation changes in 2006) from:

- The ability to incorporate other family members into the pension fund and- The ability to use the fund to purchase residential property- Access to top investment houses- Access to flexible income levels

For additional diversification it was recommended that part of the SIPP fund be invested with another provider. A Trustee Investment Plan (TIP) was proposed for that purpose. The funds recommended to be held within the SIPP were equity based and were described as being ‘relatively higher’ risk. Of the total transfer value of approximately £255,000, £155,000 was to be invested within the SIPP. The remainder would be invested within the TIP in index linked and property funds.

The charges on the SIPP were 1.8% a year (reducing to 1.2% after six years to allow for an additional 0.6% charge to provide for the cost of the advice).

In June 2005 a letter was sent to Mr N. This confirmed Mr N was ‘looking for a combination of modest to relatively higher risk funds to allow for the potential for capital growth.’

Modest risk was defined as being prepared to invest with a small risk of real or comparative loss in pursuit of longer term capital growth. It included investments such as with-profits, property and mixed managed funds.

Relatively higher risk was defined as being prepared to take some risk of real or comparative loss in pursuit of longer term capital growth. It included investments in UK equity funds, specialist sector, country and regional funds.

The letter also said that Mr N’s attention had been drawn to the GARs available from some of his policies but that Mr N was happy to forego these. Mr N was told that the transfer would not guarantee better future performance but he would have access to funds, and to different providers, which would give greater flexibility both at the time and in the future. The products recommended allowed for fund switches if required.

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A separate letter was sent to Mr N in June 2005 saying that he had decided to pay for the initial advice, as well as on-going reviews, through commission from the policy. The transfers took place between June and October 2005. The TIP was set up in September 2005.

income drawdown advice

In June 2006 Mr N contacted AJ Wealth again as he wanted to take benefits from his pension policy. He wanted the maximum tax free cash as well as the highest income available. In addition he sought to maintain the benefits paid on his death and to remain invested to obtain the possibility of future capital growth.

Mr N was informed that his options were either to:

- Purchase an annuity using the SIPP fund. This could be from the SIPP provider (or using another provider if the annuity rates available were more competitive), or;

- Transfer his pension into an income drawdown arrangement

Mr N was advised to use income drawdown. He was informed that the income (initially almost £19,000) available to him from the fund would be reviewed every five years and the maximum income would be recalculated at that time. He was told that it was important that the funds performed well when income was taken in order that the pension fund was not eroded. The critical yield required was 7.1%.

A revised investment strategy for the SIPP was proposed with the SIPP split between modest risk funds and relatively higher risk funds.

Regular reviews of the policy were provided to Mr N during which his fund value was discussed. In 2009 Mr N was informed that it was very likely that his income would need to be reduced, at the five year GAD review, which would occur in 2011. This was because his fund value had been eroded by both the level of income withdrawn and the prevailing market conditions.

In 2011 Mr N’s income was reviewed. Initially the SIPP provider said the value of the policy was £136,000 but upon clarification the actual value of the fund was £121,000. This had resulted in excess income (based on the higher fund value) being paid to Mr N. AJ Wealth contacted the SIPP provider who agreed to pay Mr N compensation for its error.

investment strategy

Further TIPs were established, and in 2011 Mr N was advised to use a discretionary managed portfolio available from his SIPP provider. There were various investment options available targeting varying returns.

Although Mr N had previously been invested in the lower to medium risk portfolio the recommendation report said that he was seeking a medium to higher risk investment. The letter recorded that as the SIPP was the only private pension owned by Mr N that if he was ‘looking to take more risk you should consider solutions which seek to reduce volatility as well as looking to provide a good potential for return and you confirmed that returns are of interest to you.’

It appears that lower risk investments had been discussed but the recommendation was based on Mr N’s ‘high’ attitude to risk. This strategy was described as being ‘suitable for customers who are prepared to accept a higher level of risk on their investments in order to seek higher potential returns in the long term.’

The letter introduced to Mr N the concept of the SIPP provider’s new managed portfolio service which would target a specific return. AJ Wealth said that Mr N had agreed to make the switch and it would facilitate this for an initial fee of 1%. On-going charges paid to AJ Wealth would remain the

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same although the business would only advise on changes being made to the underlying investment strategy thereafter.

The letter went on to say that after discussion it had been agreed that Mr N would invest in the portfolio targeting the highest level of growth. This was deemed to be the most suitable as he was looking to increase his exposure to equities to have the potential for returns going forward. Overall although the charging structure was different the annual management charge was broadly similar but no external asset charge applied (as it currently did as a result of the TIP investment). However, there would be a surrender penalty on dis- investment of the TIP. The amount of that penalty was not disclosed within the letter.

In terms of the risk profile of the strategy Mr N was told that there were no guarantees that the proposed strategy would outperform the existing one but it would have a greater diversification. The value of the policy and the income from it could fall as well as rise.

our initial conclusions

Mr N’s complaint was investigated by an adjudicator who did not recommend that the complaint be upheld.

Mr N did not agree with the assessment saying:

- His complaint was as set out in a letter he had enclosed with the complaint form and is not restricted to the points referred to by the adjudicator.

- The risks associated with the advice had not been adequately described to him. For example although in 2009 he was notified about his income 'going up or down' he was not provided with illustrative figures.

- He had informed AJ Wealth that he was relying on the income from the SIPP and could not take risks with it.

- No notes were taken by his adviser during the meetings. Therefore the fact find notes cannot be contemporaneous.

- He was not given sufficient time or information to review the recommendation to increase the risk profile of his SIPP in 2011. He considers this advice to have been entirely unsuited to his needs and circumstances at the time.

- The actions taken by AJ Wealth when the erroneous SIPP value was discovered were without his consent.

additional information

We asked Mr N to provide more information which I will summarise as follows.

- The tax free cash from his pension fund was used to repay (in part) his interest-only mortgage and also to reduce other liabilities.

- He had no investments or savings at the time of advice. His mortgage required repayments of £1,782 a month. He does not recall being asked about his outgoings or any liabilities at the meeting with AJ Wealth.

- He received no capital sum on stopping work but his former employer would pay him income of £350 a month until 2015.

- Although the death benefits from an income drawdown arrangement were an advantage the main point of the pension fund was to provide him with income once he had stopped working.

- It is ‘impossible’ now to buy an annuity based on the low annuity rates available therefore he has no option but to remain in income drawdown.

AJ Wealth was asked to provide information about the original advice to transfer into the SIPP and did so. It also said that:

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- Mr N confirmed during several meetings that he had sufficient capital and income to be able to afford to retire. He wanted to take things easier in retirement although he may have continued to do some on-going work. He did not retire on the grounds of ill health.

- Mr N did not advise AJ Wealth that he had a mortgage nor did he refer to other debts. He would not provide a breakdown of outgoings but said that his income exceeded the outgoings. He gave the impression of a wealthy lifestyle. AJ Wealth assumed that he did not wish to make it aware of such a substantial debt and his true financial position.

- Mr N did not tell AJ Wealth that he intended to downsize his home but would still have a significant mortgage once he had done so. Nonetheless the mortgage lender must have been satisfied that he could support that mortgage. Furthermore Mr N had told the adviser that he was expensively renovating that property and the impression given was that ‘there was no expense spared.’

- Discussions took place about the various methods of taking pension income before the transfers into the SIPP. This was to ensure that the advice was in keeping with his future intentions for retirement, and how he wished to eventually take his benefits.

- After he retired Mr N would continue to receive money from his former employer. Mr N also expected to receive inheritances such that he expected his estate to be worth in excess of £1 million. However, he did not need advice about inheritance tax planning.

- Mr N was informed of the maximum permissible income withdrawals but was also told that the capital of his pension fund would be affected in the event of poor market conditions. He was adamant that he wanted to take maximum levels of benefits. He was aware of the five yearly reviews and that the income being taken from the fund was not guaranteed. The effect of his income withdrawals on the fund value was discussed at each meeting with Mr N but he chose to ignore warnings about his future income. He now says that a new adviser has recommended that he take a lower level of income.

- The pension fund had actually performed well during difficult investment times taking into account the income paid out from the policy. His losses are therefore as a result of the income levels taken from the policy.

- The proposal to use the managed portfolio strategy was to attempt to sustain the portfolio value. Mr N requested the higher risk strategy in order to have better potential for growth. He confirmed at the time that he did not wish to reconsider an annuity.AJ Wealth understands that the investment strategy of his pension policy had not been changed.

my provisional decision and responses to it

I issued a provisional decision upholding the complaint. In brief I said that Mr N had not been properly advised about the risks of income drawdown and that had this happened he would have accepted a recommendation to take his retirement income by way of annuity purchase (including where available a GAR).

AJ Wealth disagreed. It provided a lengthy response to my decision. Since then both parties have provided substantial submissions which I have read in detail. However, in order to avoid this document becoming excessively lengthy and for ease of reference I have collated the main points of those submissions as follows.

disclosure by Mr N

- Mr N had made enquiries about his retirement options before meeting with AJ Wealth.However, he said that the result of those enquiries was that he realised that he needed professional assistance before taking any decision.

- AJ Wealth said that Mr N declined to disclose full information about his income and outgoings. However, he gave AJ Wealth to understand that he was a very wealthy individual and that he did not have any liabilities.

- Furthermore, Mr N did not say that the suitability report mis-stated his personal and financial circumstances or his objectives and attitude to risk. Therefore AJ Wealth was reasonably entitled to believe that these had been accurately established.

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- Mr N said that the fact finds were not signed by him and were not completed at the meetings with AJ Wealth’s adviser.

- He also disagreed that he had not provided details of his mortgage and that he was unable to provide other information. He was unaware that they might be needed.AJ Wealth had not pressed him to provide this information and it was not made clear that the advice he was given would be limited by the lack of information he had provided.

attitude to risk & increase in risk profile (2011)

- AJ Wealth said that Mr N’s recorded attitude to risk was initially deemed to be modest to relatively higher risk and it was not conservative as he now alleges. Based on those definitions he was prepared to accept a relatively high level of risk in relation to his pension funds. Furthermore AJ Wealth is satisfied that Mr N understood the concept of investment risk.

- Consumers are expected to make reasonable efforts to understand documents they are given. Mr N’s professional standing means that he would have understood the importance of reading all information provided to him.

- Mr N said that he does not dispute receiving documentation from his SIPP provider but he was reliant on the advice given to him by AJ Wealth. He said that the significance of factors such as the critical yield and mortality drag were not explained and the risk warnings were not provided to him in a meaningful way.

- In 2011 his income fell as a result of the GAD review. Mr N maintained that he wanted to continue to maximise the potential returns on his fund and was told that he would need to increase the proportion of his fund held in equities in order to do that. A new investment strategy was proposed (the fourth of five) but Mr N indicated that he wanted to invest in the highest risk portfolio.

- Mr N completed an attitude to risk questionnaire that supported this.o This included the response that he was prepared to take a high risk with his

financial affairs and wanted to do so with future investment decisions.o When asked whether he could tolerate the risk of large investment losses in order to

increase the likelihood of achieving high returns he agreed.- Mr N was made aware that there were no guarantees that this strategy would

outperform the existing investment funds.- AJ Wealth said that Mr N was prepared to take the level of risk required to sustain the income

he needed and was not prepared to reduce that income. He was provided with express advice against taking the maximum permissible income available at the outset and at the annual review meetings.

- However, Mr N says that although the meetings took place he disagrees that the risks were explained. AJ Wealth did not indicate that his fund and income levels could not be maintained or that his investment strategy was unrealistic.

- Mr N noted the difference between the advice given to him face-to-face in 2011 and the information provided to him after that meeting. He had requested the meeting because of the state of his pension fund. He did not express a preference for the higher risk strategy nor does he recall the attitude to risk questionnaire. When he made a subject access request this was not provided by AJ Wealth.

- Mr N told us that he has since sought independent financial advice from a third party.That adviser’s opinion was that the SIPP’s investment strategy was above his stated risk tolerance and this was not advisable.

- Consequently he reduced the risk profile of his SIPP in November 2012. AJ Wealth disputes this.

We asked Mr N’s SIPP provider for details of changes made to the SIPP. It confirmed that Mr N had requested that the investment profile of his SIPP be reduced but it was unable to comply with the request as it had not been carried out in line with the policy’s terms and conditions.

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preference for income drawdown over annuity

- AJ Wealth said Mr N wanted to transfer into a SIPP for the purposes of income drawdown as he had researched his options before meeting with the business. He was not keen to purchase an annuity as he wanted to be able to pass his pension fund to his wife and children.

- His objectives, at the initial meeting in 2005, were to consolidate his pension funds, review the investments to provide a diversified investment strategy with longer term potential for capital growth.

- In terms of the disadvantages of income drawdown Mr N was told thato If investment returns are poor, the pension fund could be reduced in futureo Pension income could be considerably lower than an annuity in futureo Annuity rates could fallo Drawdown presented higher on-going costs than an annuity.

This represented an accurate summary of the main disadvantages of income drawdown at the time.

- The key features document provided contained a detailed set of risk warnings which were discussed with Mr N in detail. This included the fact that ‘If the income you withdraw is higher than the plan’s investment growth (after charges) the plan’s value could reduce. If you withdraw a high level of income, you may not be able to continue taking that level of income for a long period if investment growth is low during that time. If you continue to take a high level of income over a long period of time you could greatly reduce the amount you will have left to buy your pension’

- When Mr N needed to take benefits he sought both the maximum income and tax free cash. At the time other methods of income provision were discussed and it was noted that it was his intention to move into drawdown. Again the features of that strategy were discussed including the potential that his capital and income could fall.

- The critical yield required from the pension fund (7.1%) and the concept of mortality drag was explained to Mr N.

- It said Mr N had not made the assertion that he would have bought an annuity before that was solicited by this service. But, his argument is not sustainable based on evidence provided by a) his new financial adviser (business B) and b) his SIPP provider. Mr N’s objectives are now materially the same as when he met with AJ Wealth’s adviser.

- AJ Wealth also provided a copy of an article from the national press which referred to annuity sales being investigated by the FCA. It felt that income drawdown had been an appropriate recommendation (or at least a reasonable one) in many cases where appropriate advice and risk warnings were given. Together this showed that the assumption that annuities were more suitable than income drawdown is an outdated one.

GARs

AJ Wealth pointed out that some of his existing pension policies had guaranteed annuity rates and Mr N said that he was happy to forego them.

In terms of the redress proposed. The GAR policies would have provided only a single life pension not a joint life one as specified in the provisional decision. In any case these policies formed only a small part of Mr N’s overall pension arrangements.

We contacted Mr N’s former pension providers. One of the GARs was not available before the age of 65 but the other would have been available on a variety of bases (including joint life) at an earlier age.

compensation

AJ Wealth was under a duty of care to take reasonable steps to ensure that its recommendations were suitable. It is satisfied that it complied with this requirement.

It was unclear to AJ Wealth why I had proposed that an allowance should be made for 50% of the higher income Mr N had received through income drawdown rather than an annuity. This is

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unreasonable and inconsistent with both the law and the guidance provided by our website’s technical resource section.

The calculation proposed does not take into account the investment growth achieved between the date of transfer and the date benefits were taken. It would be unreasonable not to allow for that.

My proposed award for distress and inconvenience was not justified. Mr N’s income had fallen but this was not as a result of AJ Wealth’s actions nor has Mr N suffered a loss as a result. It did not understand on what basis such an award would be made.

Mr N sought additional payment for the costs of receiving additional advice. AJ Wealth requested sight of the relevant invoice as it does not consider that meeting the costs would be appropriate. Not least because Mr N’s pension fund has not been altered from the ‘inappropriate’ investments he has complained about.

Mr N said that his preference for receiving a lump sum compensation payment reflected the fact that he had no confidence in AJ Wealth’s ability to carry out the calculation. Additionally he has the right to seek independent advice and obtain the best terms he can.

Mr N also told us that he remained dissatisfied with the treatment he had received from AJ Wealth in respect of its dealings with his SIPP provider after the fund value error was realised. In particular he said that AJ Wealth was reluctant to speak to him by telephone and that he had been told the complaint had been resolved without having any input.

Furthermore, Mr N was eligible to take a further small income payment from the SIPP but AJ Wealth did not facilitate this.

the scope of this complaint and our jurisdiction to consider it

AJ Wealth said that:

Mr N had not made a complaint about the advice to transfer to the SIPP albeit that the provisional decision said that the transfer was unsuitable. Mr N’s existing pension policies were invested with a proportion in equities therefore not on a cautious/conservative or low risk basis. Approximately 60% of the funds transferred were invested in a number of equity funds on a relatively higher risk basis. The initial fund selection performed well and Mr N has made no complaint about that.

Any complaint concerning the advice to transfer to the SIPP (which has not been complained about) is now time barred on the basis that the advice occurred more than six years ago.

I issued a decision concluding that this complaint was one that the Financial Ombudsman Service was able to review and was therefore not ‘time barred’ as AJ Wealth had said.

AJ Wealth’s representative wrote again following that decision. It did not consider that my decision represented a proper finding in respect of the objections raised to our consideration of the complaint. Therefore, it would seek to judicially review any decision issued which makes any determination or award in respect of the 2005 advice. Furthermore it disagreed that Mr N would not have known until 2011 that his income could be reduced. He was informed of this at the advice points in 2005 and 2006 and at each of the annual reviews. As acknowledged in my provisional decision Mr N was told in 2009 that he would almost certainly need to reduce his income at the GAD review.

In support of this it said that the annual reviews carried out by AJ Wealth rebalanced Mr N’s pension fund in line with his selected attitude to risk and also discussed the level of income he was receiving from his pension fund.

In 2007 Mr N was informed that if he wished to maintain the level of income being taken from his pension fund the investments it contained would have to perform very well in order to avoid the erosion of the fund value.

In 2008 AJ Wealth discussed whether Mr N should reduce his income but Mr N said that he did not want to do that at this point.

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In 2009 Mr N said that he wanted to retain the ability to pass his pension fund to his wife and children and to remain in drawdown. He also wanted to continue to take the maximum income. AJ Wealth informed him that he would almost certainly need to reduce his income at the next GAD review and expressed surprise that he did not want to do that now.

In 2010 AJ Wealth discussed whether it remained necessary to take the maximum income from Mr N’s pension policies in view of on-going market volatility. Mr N confirmed that he did not wish to do so and was happy to remain invested in line with the modest to relatively higher risk profile he had.

Mr N now says that he would have bought an annuity. AJ Wealth says this is with the benefit of hindsight and contrary to the information available at the time and therefore should be dismissed. In all likelihood had Mr N been advised to take out an annuity he would have proceeded to enter into income drawdown. An annuity would not have provided sufficient income to meet his monthly liabilities. In addition Mr N has not yet bought an annuity making it pretty much impossible for him to argue that he would have done so had he received other advice from AJ Wealth. He has also requested that compensation be paid directly to him rather than a payment into his pension policy on the basis that he has instructed his financial adviser to consider all possibilities – including annuity purchase.

subsequent advice

We approached business B to obtain its complete file on Mr N. Copies of documentation received have been sent to AJ Wealth and Mr N. In summary:

- Mr N’s new adviser recommended that he cease income withdrawals and buy an annuity with the proceeds of the SIPP. He did so because the income from the SIPP represented a quarter of his household income (state pension and rental income made up the remainder) and therefore Mr N was reliant on it. That adviser also warned him that withdrawing capital at that rate would deplete the capital.

- However, Mr N was reluctant to buy an annuity at the time because the rates were low and the decision irreversible. He wanted to retain the flexibility available within his SIPP and to continue with income drawdown. Business B said that if he made that choice it would treat him as an insistent client going forward.

Mr N told us that because of the expense he had put a hold on taking further advice pending the resolution of his complaint.

AJ Wealth was provided with a copy of the emailed advice given by business B. Having seen that, it said that in order for me to award Mr N compensation I must be satisfied that Mr N would not have proceeded with the SIPP and would have purchased an annuity had he been provided with sufficient information about the risks involved with income drawdown. Mr N has not satisfied that test.

AJ Wealth responded. In addition to repeating comments made earlier it said that it had a number of concerns about the letter being sent to Mr N. Specifically:

- I said that business B’s explanation of income drawdown was thorough. It does not accept that AJ Wealth’s communication was less so.

- My decision appears to be based on Mr N’s comments and not the contemporaneous evidence which ought to carry considerably more weight.

- This service approached Mr N asking what he would have done had he been advised to purchase an annuity in 2006. This was unsatisfactory and the evidence “solicited”. However, the assertions made cannot be sustained in light of evidence obtained from Mr N’s advisers and pension provider.

- Mr N did not say either that he would not have entered into income drawdown or taken the maximum level of income or that he would have purchased an annuity before I issued my provisional decision.

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- In any case asking Mr N whether had he been given the same explanation in 2005/2006 he would have made the same decision to enter into income drawdown was unnecessary. Mr N has remained committed to income drawdown following advice from business B and has not yet bought an annuity (against the advice given to him to do so). This demonstrates that he did not intend to buy an annuity thus supporting AJ Wealth’s case.

- Mr N told business B that he was ‘not keen’ to purchase an annuity because he had a requirement for flexible income and ‘to invest the scheme’s assets into a discretionary managed portfolio’. His objectives had not changed since they were explained to AJ Wealth.

- Even if Mr N had been advised by AJ Wealth to purchase an annuity he would still have proceeded with the transfer and entered into income drawdown. Thus, there is no reasonable basis on which I can uphold the complaint. To do so would not be fair or reasonable but would be irrational and/or perverse.

- Mr N says that he transferred to a lower risk portfolio in November 2012. This did not take place which undermines his credibility.

- In light of the information received from the SIPP provider and business B the complaint should be dismissed.

- If Mr N’s complaint were to be upheld on the basis of any comments made following our investigation of his complaint rather than contemporaneous evidence it asked that an oral hearing be held in order that Mr N could be examined on the inconsistencies in his evidence.

- It concluded by saying that it had not received a response to the request for a hearing first raised in March 2014 and by saying that my apparent prejudice against income drawdown was out of line with current thinking.

Mr N said:

- AJ Wealth did not inform him that different annuity types existed and it was business B’s adviser who explained that he could tailor an annuity to suit his particular needs – for example value protection, guarantees and spouse’s pensions. Although they in total did not provide the same level of flexibility as income drawdown if AJ Wealth had provided the information given to him by business B he would not have gone into income drawdown.

- He has been unable to take a decision over his pension income until the complaint has been resolved. He will take further advice at that point.

my provisional findings

I have considered all the available evidence and arguments to decide what is fair and reasonable in the circumstances of this complaint. Given the number of issues raised by both parties since my initial provisional decision it was necessary for me to revisit the file in its entirety in order to reach a fair and reasonable conclusion. I apologise for the additional time this has taken.

Before commenting on the merits of Mr N’s complaint it is appropriate that I consider the additional points made by AJ Wealth’s representative about this service’s ability to consider the complaint and the specific nature of the complaint made.

Mr N confirmed in his response to the adjudicator’s assessment that the matters being complained about (set out in the document accompanying our complaint form) were not restricted to the income he was taking from his pension policy. He said that AJ Wealth recommended that he transfer to the SIPP and provided him with advice before he stopped working. Neither of these points has been queried by AJ Wealth. However, on the basis that Mr N has raised wider issues about the advice he received from AJ Wealth, including the initial recommendations, it is appropriate that my investigation of his complaint encompasses all the issues raised by Mr N.

Turning to the question of whether Mr N had referred his complaint within the time limits that apply to this service. I have already issued a decision saying that this complaint is one that we are able to consider. I still think that is the correct position.

However, our investigation has shown that only one of the existing policies with a

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guaranteed annuity rate would have been available in 2006. That had a relatively small value and although the annuity would have provided more income and there were additional charges for the SIPP, the investment performance until 2006 was quite good. It is therefore not clear what loss, if any, would have been caused by that advice. Obtaining the information to calculate that loss (or gain) could be difficult. I think the difference will be relatively small. I therefore now intend to only deal with the advice given in 2006.

Because of the considerable amount of correspondence that has arisen since my provisional decision I am setting out my view in a further provisional decision in order to give both parties additional opportunity to comment. AJ Wealth’s representative has asked that I hold a hearing in order that Mr N be cross-examined. I have not yet responded to the comments raised on the basis that the proposal for a hearing was made if I did not change my overall view of the complaint.

Since then I have undertaken further investigation given the number and strength of the objections raised. I am now in a position to be able to issue my provisional decision and the remainder of this document will detail my conclusions. However, it is appropriate at this point to note that my overall opinion has not changed.

That said, A J Wealth is entitled to request a hearing and I will consider that upon receipt of details of the points or evidence it wishes to raise. However, it is relevant to note that should a hearing take place the process is not designed to be used to cross examine either party. It is my present opinion that I am able to reach an outcome on this case based on the information provided to us.

This case is in many ways a complex one. Mr N’s initial complaint to this service has many aspects that have needed to be considered and the information provided to us has been, in places, conflicting. As a result I have requested and obtained additional information to assist me in reaching my conclusions. I acknowledge, but do not share, AJ Wealth’s concern that we have in some way attempted to seek information to support Mr N’s claim.

I also acknowledge that the most important documentation in this case is that produced at the time of advice in 2005 and 2006. But I have also considered that actions taken (or not taken) since then do reflect and are affected by what has gone before.

AJ Wealth was giving advice to Mr N and was required to give suitable advice. The rules regulated businesses were required to follow were set out in the FSA Handbook in the Conduct of Business (COB) section. COB 5 is relevant in this case. COB 5.2 deals with the requirement to know your customer and COB 5.3 deals with the requirement to give suitable advice.

A document called a confidential client questionnaire was completed by the adviser and dated 29 March 2005. Although there was a space for the client to sign, Mr N has not signed the document. Details of Mr and Mrs N’s income in the year before he retired were recorded together with details of his existing pension policies. Mrs N owned a property from which she received rental income of about £10,000 a year. Some of the notes indicate that Mr N was expecting an inheritance of about £40,000. It is recorded that Mr N had no mortgage.

The central point to this complaint for me is whether the advice given to Mr N to enter into income drawdown and take maximum withdrawals was suitable. There I have two concerns: that Mr N’s personal and financial situation was not accurately established and that Mr N was not provided with adequate risk warnings.

On the first point it has become apparent that Mr N’s financial situation was not secure as AJ Wealth had believed. In particular he had a large mortgage that would have been difficult to maintain after leaving full-time employment. The fact find did not establish Mr N’s assets or liabilities nor was Mr N’s required income assessed before advice given.

I accept Mr N is unlikely to have volunteered the information necessary for AJ Wealth to assess his income needs in retirement. But AJ Wealth should have been aware of the implications of Mr N not

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providing that information and explained that to him. I think Mr N would have provided detailed information once its significance had been explained to him.

The Personal Investment Authority (PIA), which was the regulator at the time, issued regulatory updates 55 and 67 setting out specimen risk warnings which it recommended financial advisers use. These are:

1. High income withdrawals may not be sustainable during the deferral period2. Taking withdrawals may erode the capital value of the fund, especially if investment returns are poor and a high level of income is being taken. This could result in a lower income when the annuity is eventually purchased.3. The investment returns may be less than those shown in the illustrations.4. Annuity rates may be at a worse level when annuity purchase takes place.

When Mr N was advised to take pension benefits he was informed that ‘in the event of poor investment returns, the income taken could erode into the capital value of your fund.’ He was also advised that past performance was not necessarily a guide to future performance and that unit values could fall as well as rise. This falls short of the detail set out by the PIA.

AJ Wealth has said that Mr N was provided with product literature that would have explained the risks of income drawdown and the specific risks of taking a high level of income. I note that Mr N was advised to read the accompanying documentation carefully.

Mr N has informed us that he had on-going commitments and was seeking a high level of income. It seems that even with the highest income available through income drawdown Mr N would not have been able to sustain his regular outgoings permanently and AJ Wealth should have discussed the possibility that should early retirement go ahead it would likely require significant lifestyle changes.

Mr N had been recorded as seeking a modest to higher risk investment strategy. I do not consider that Mr N was willing or able to tolerate the level of risk associated with taking maximum income withdrawals. I have however, considered the possibility that Mr N would have entered into income drawdown but taking a lower level of income. I accept that some of the features of income drawdown would have fitted Mr N’s objectives better than an annuity. And his objectives in 2012 had not significantly altered from the point he met AJ Wealth’s adviser.

I do not consider that a recommendation to take maximum drawdown was suitable for Mr N. It seems to me that the position, had the comparison been with an annuity and a lower level of income drawdown the decision, would not have been so clear.

But although income drawdown would have allowed Mr N the flexibility to change his income levels it is not clear that this would have been particularly attractive to him. I accept that Mr N has, until recently, taken the highest level of income available to him. AJ Wealth has said that Mr N was warned at its annual review meetings that he should review his income levels. This is not reflected in the documentation presented after those meetings. If it had been discussed and treated as being an important part of the advice I would have expected that to have been recorded.

And although Mr N did not wish to see the value of his pension fund lost on his premature death there were ways of mitigating that through annuity purchase. In addition as Mr N was relatively young at the time he stopped work and was in good health there could have been other ways of providing a capital sum on his death which did not expose his entire pension fund to the possibility of investment losses and a reduction in his income. The SIPP fund represented the main source of his income for the next few years and once the state pension started would still form a large part of the household income thereafter.

So income drawdown could have provided Mr N with death benefits that better suited his intentions. Nonetheless, the pension fund was the only source to provide both him and his wife with an income

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for the remainder of their lives. Taking all factors into account I am of the view that he ought to have been recommended an annuity.

AJ Wealth argues that had it done so Mr N would have rejected that advice. It notes that despite receiving advice to purchase an annuity by business B more recently he has not done so. But the documentation supplied to us by business B puts Mr N’s decision into context. Although Mr N has not purchased an annuity he gave his reasons for that to business B. He has since repeated them (in similar terms) to this service. And on review I do not conclude that a decision made by Mr N in recent years can be used to determine what decision he would have made when he met with AJ Wealth. Mr N’s experience of fund performance, general views on investment performance and the reduction in annuity rates would have significantly influenced his decision.

On a related matter it is worth clarifying here that we contacted Mr N’s SIPP provider who confirmed that Mr N instructed it to reduce the risk profile of his SIPP. The terms and conditions of the plan did not allow this and the switch could not actually happen on Mr N’s instructions but I am satisfied that Mr N took steps to de-risk his pension fund after receiving advice from business B in 2012.

In returning to the central issue of the complaint I have considered whether I think Mr N would have accepted a recommendation to purchase an annuity. It is not possible now to be totally certain that he would have made that decision as it seems likely that this would have enforced lifestyle changes on him sooner than he would have wanted to. But I have based my decision on the balance of probabilities – in other words, on what I consider is most likely to have happened in the light of the evidence.

That decision is that Mr N would have accepted a lower, guaranteed income payable for the remainder of his and his wife’s lives. The risks involved in taking income drawdown were greater than he indicated to AJ Wealth that he was prepared to take and furthermore were greater than he was able to tolerate. So, had Mr N been provided with details of the advantages and disadvantages of both methods of producing retirement income he would have accepted the guarantees provided by an annuity over the potential benefits and risks of income drawdown.

Mr N has also complained about subsequent actions taken by AJ Wealth for his pension fund. Firstly the advice to transfer to a higher risk investment strategy and secondly the issues arising after his SIPP provider provided an incorrect SIPP valuation.

In terms of that latter point although AJ Wealth did, on becoming aware of the problem, attempt to reach a satisfactory conclusion with Mr N’s SIPP provider and that provider made an offer of financial compensation. I have seen nothing to suggest that Mr N could not have taken matters up directly with the SIPP provider had he chosen so to do or that AJ Wealth’s actions precluded him from doing so subsequently. I am not aware that Mr N has raised this matter with his SIPP provider as a formal complaint but in any case I would be unable to review that matter as part of this decision.

In terms of the investment strategy I note that AJ Wealth advised Mr N that the Wrap SIPP was available. Mr N notes that his funds were placed in the highest risk investment strategy: AJ Wealth say this was at Mr N’s request. Based on the documentation provided to us the initial strategy proposed was the second highest risk profile. It is not entirely clear why that was changed. Irrespective though the advice Mr N was given was to transfer his funds into that strategy as it was felt suitable in the circumstances.

However, I note that when Mr N’s investments were moved to a wrap platform in 2009 and initially held in the model portfolio 3 (low-medium risk). Mr N was informed in June 2010 that the business had decided in light of the on-going volatility it would ‘recommend that you take a more defensive strategy and have made fund changes in order to reduce the overall risk within each of our model portfolios’.

But by 2011 Mr N’s income had been reduced significantly and the fund value depleted. Therefore, income drawdown was a high risk prospect and there was a real danger that the fund would over

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time become depleted. Increasing the risk attached to his pension fund at that point meant that Mr N was relying on a level of investment performance over the level of income being taken from the policy plus the charges applicable to it.

AJ Wealth has said that it had reassessed Mr N’s attitude to risk before recommending a new course of action. But the increase in attitude to investment risk was notable and was possibly related to the income reduction resulting from the GAD review and AJ Wealth ought to have given Mr N explicit warnings about this. However, I say this largely for completeness as for the reasons set out above I have concluded that Mr N should have been advised to purchase an annuity in 2006 and not entered into income drawdown.

As a final point AJ Wealth has objected to an award being made for Mr N’s costs in seeking financial advice from business B. Mr N has yet to act on the advice although tells us that he intends to do so when the complaint has been resolved. It seems likely that additional costs will be incurred should Mr N seek further advice in future. Mr N sought advice to get assistance with the difficult position he found himself in and that position was a result of the advice given to him by AJ Wealth. Therefore, I am of the view that AJ Wealth should make good part of the additional costs Mr N has incurred and should pay to Mr N the cost of the advice he has received from business B to date.

As well as taking the maximum tax free cash available, Mr N took the maximum income allowed from his income drawdown plan, £18,997.56, until the income limits were reviewed in 2011. That was substantially more than the income available from a suitable annuity. Based on a comparative annuity rate of 5.8357% the residual fund value of £236,289.54 would have provided an income of about £13,789.

Mr N has provided the figures for the fund value of his pension policy and the tax free cash he received. The annuity figure above has been calculated using historic Moneyfacts annuity rates (on a joint life (2/3), level basis guaranteed for five years) assuming Mr N is five years older than his spouse.

Mr N received a higher level of income from his SIPP than he would have done if he had bought an annuity. The approach I intend to take follows that set out in a publication from the PIA Ombudsman Bureau in March 1997 –‘News from the Ombudsman Bureau’. Within that document it explained the approach to be taken for income withdrawals following the Court of Appeals judgement in the case of R v ICS ex parte Bowden. Essentially, that explained that the approach to compensation was, as always, based on the facts of the case. But, where advice had been given and that led to money being dissipated and the consumer altering their financial position for the worse, the extra income will be ignored. Where additional income was spent on items with lasting financial value, the value of those items should be taken into account.

I have already explained my findings that the advice Mr N received was unsuitable for his circumstances. He received about £5,200 a year more gross income a year than he would have received from an annuity in each of the first five years. I have considered what Mr N has done with that additional income. Mr N had a large mortgage on his home and has since moved twice. A significant part of his income was spent on the mortgage and a large part of that would have been interest. I think if Mr N had been given suitable advice in 2006 and made different financial decisions that he would have altered his plans. I cannot say with certainty what he would have done, but it seems likely to me that he would have moved to a smaller house sooner and repaid his mortgage. I currently consider that all of the extra income from 2006 to 2011 should therefore be ignored in the calculation of Mr N’s loss.

my revised provisional decision

I intend to uphold Mr N's complaint on the basis that he ought to have been advised to buy an annuity with his pension policies rather than transfer to a SIPP. To determine whether Mr N has suffered a financial loss AJ Wealth should make the following calculation.

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1. Determine the current transfer value of Mr N’s SIPP.2. Calculate the amount of income Mr N has received from his SIPP.3. Obtain the values of Mr N's SIPP in 2006.4. Obtain the rate payable to Mr N on the open market in July 2006 for a level annuity with

2/3rds spouse’s pension guaranteed for 5 years.5. Calculate the income Mr N would have received from the annuities set out in 4

above.

We have calculated that Mr N could have obtained an annuity of about £13,789 a year in 2006. However, after his income level was reviewed in 2011 his permitted income drawdown level has been lower than £13,789. This difference should be paid to Mr N as a lump sum.

6. AJ Wealth should then determine the annuity that would now be paid to Mr N on the same basis as before but taking into account the current fund available. If this annuity is lower than the total annuity income Mr N could have received in 2006 (£13,789) then A J Wealth should pay for the cost of buying an additional annuity for the difference. If this is not practical A J Wealth should pay Mr N the capitalised value of that additional income - less a deduction for his marginal rate of tax, which I assume to be basic rate tax of 20%.

I also consider that Mr N has suffered significant distress and inconvenience as a result of the advice he received. He did not receive any income for some time and has moved house twice. Mr N is very likely to have needed to make adjustments to his lifestyle once he ceased working but the recommendation to enter into income drawdown has exacerbated the distress caused. I therefore remain of the view that an award for distress and inconvenience is appropriate in this case. I intend to award £500 for the distress and inconvenience caused.

Mr N has presented us with a copy of the invoice raised by business B for the advice he was given in 2012 of £1,554. He would not have had to pay for that advice if he had been advised to buy an annuity. I think that the cost of advice is reasonable and intend to make an award for the full cost of that advice. Simple interest is to be added to that amount at a rate of 8% gross a year from the date Mr N paid the fee until the date AJ Wealth pays the award.

Roy Milneombudsman

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