Rogue investment firms and scam artists are having a field day says Jeff Salway
Lamborghini salesmen might not be cashing it in after the first six months of the so-called “pension freedoms” – but rogue investment firms and fraudsters are having a field day.
Suggestions that over-55s would respond to new rules on access to pension pots by splashing their savings on sports cars and round-the-world cruises have so far proved wide of the mark.
Other fears are being realised, however. The evidence so far points to low awareness of the tax implications of raiding pension pots, while thousands of people have been bombarded by cold calls as fraudsters take advantage of confusion over the reforms.
The overhaul, which took effect on 6 April, means that members of defined contribution (DC) schemes can now access their entire pension pot from the age of 55 without incurring heavy tax penalties. Up to 25 per cent can be taken tax-free and the remainder is now taxed at the saver’s marginal rate, rather than the previous 55 per cent.
But the reforms and the issues they’ve highlighted have sparked a series of consultations and inquiries as the Financial Conduct Authority (FCA) and the Treasury reassess rules on areas including advice, charges, risk warnings and consumer communications.
One of the biggest concerns is over the take-up of Pension Wise, the free guidance service, while providers report many people have asked to take all their pension cash at once , not realising they still have to pay tax on the amount above £25,000.
Almost 60,000 people have cashed in their entire pension in one go, according to the FCA, including 137 who have taken more than £250,000 and been landed with a huge tax bill.
Of those who took a cash lump sum, 95 per cent withdrew the entire fund, Association of British Insurers (ABI) figures show, with more than half of those one-off payouts going to people aged between 55 and 60. Most of those pots were worth less than £30,000, said the ABI, which pointed out that until 6 April, only people aged 60 or over were allowed to cash in pots of less than £10,000.
There have also been numerous reports of people taking cash out of their pensions and falling victim to scams, such as high-risk, unregulated investment plans. Two in five Citizens Advice staff delivering the face-to-face element of Pension Wise said they had spoken to people who had been targeted at least once by pension scams.
Those at the greatest risk of making expensive mistake are people who are unable or unwilling to take professional advice and who rely instead on generic guidance, warned Carl Melvin, director of Affluent Financial Planning in Paisley.
“Ideally, they should have a lifetime cash flow plan developed, but the cost is high and most won’t pay for this,” he said. “The issue is particularly acute with lower income and small fund holders who won’t or can’t pay for advice. A combination of poor understanding of the issues and a small fund that won’t last long enough may result in poor pensioners later.”
The cost of not taking advice could be huge, said Graeme Mitchell, director of Galashiels-based Lowland Financial Planning. “Even if it simply confirms you have not missed anything important, like a valuable guaranteed annuity or not taking all your income at one time, I would argue that it’s worth doing.”
Most people taking advantage of the changes have been “calm and considered” in their decision-making, said Jamie Jenkins, head of pensions strategy at Standard Life.
“The overwhelming majority of our customers have chosen to remain invested, debunking initial predictions that those at retirement would cash in their pots hastily and incur a significant tax charge.”
The Edinburgh-based insurer is among several firms to have launched a non-advised drawdown proposition, aimed at people with relatively modest pension pots who may previously have bought an annuity but would now prefer to remain invested and take an income directly from their fund. This isn’t always suitable, however.
“It’s no great surprise that annuities are unpopular as they can appear poor value,” said Mitchell. “But there is still a place for them, especially for people who are risk averse and have limited alternatives to turn to when market falls impact on their pensions.”