Don’t Fall Down the Pension Freedom Hole

Pension Freedom Day, April 6 2015, saw the most radical changes to pensions, a pension revolution even. The political spin was that it would enable ‘freedom and choice’. But with choice can come confusion and mistakes – and this appears to be the case one year on with pension freedoms.

Pension savers aged 55 and over can access their pension savings when they wish, with no requirement to buy an annuity. This means they can dip in and make as many withdrawals as they want, on each occasion getting 25% tax-free and the rest taxed at their normal tax rate. Or they can simply take all the eggs in their pension basket.

Beware The Vultures

These freedoms have struck a deep chord with the public, which has cashed in nearly £6 billion, but it has also led to a sharp rise in pension scams. Retirees have proved a soft target for scammers who are cold calling and trying to get people to do all types of unsuitable things, such as release their cash before age 55 (often illegal, if not massively expensive), or cash in final salary pensions when they should not, high fees equity or income products and a variety of other creative but dangerous products with unusually high investment return promises.

A study published on the 25 May 2016 by the regulator, the FCA, showed four in ten people have moved money out of savings into investments as the sustained period of low interest rates has seen over 55s adopting riskier investment behaviour in a bid to get a better rate of return.

Research by Citizens Advice suggests that as many as 10.9 million consumers may have received unsolicited contact — such as a cold call or text — about a pension since April 2015. More than three-quarters or 78%per cent who had received an unsolicited contact were offered free pension advice or reviews.

But the fast growth of DIY drawdown is also worrying as novice investors are putting their funds at risk. But this is not just confined to pension scams or schemes. Retirees also need to be wary of buy-to-let, peer-to- peer lending, crowd funding, impact or social investing, ethical funds and new supposedly ‘guarantee’ income funds. In fact if anyone ever says you will get a guaranteed X% return or income, you should run in the other direction.

Golden Rules for Your Nest Egg

Ironically, there is not enough choice for consistent performing, low cost products. Products that are well diversified to manage risk, charge fair fees and balance Cost, Risk and Returns.

So I would suggest these golden rules:

• if you do not understand it, do not invest
• if it is too good to be true, it probably is
• take time to consider your options very carefully
• make sure you know all the costs at all layers – demand total fee transparency (which is not legally required to be shown to customers in the UK)
• Seek to balance Costs, Risk and Returns