PUBLISHED: 10:02 23 October 2015
Many retirees have waited eagerly to unlock their pensions, but for some the promise of greater choice hasn't lived up to expectation. Mike Williams of financial advisers Chamberlain Stean and West looks at the situation and how to avoid costly mistakes
According to government figures, more than 60,000 people have already taken advantage of pension reforms to access their savings, with providers releasing more than £1bn in the first three months of the financial year. With just 20 per cent of those over-55s taking up free guidance offered through the Pension Wise Service, the readiness to embrace the reforms without seeking advice could leave many at risk.
There’s also frustration that providers are failing to meet customer demands. The Financial Conduct Authority stated that several companies have had operational problems, including Friends Life, which told 1,300 customers that the option to take flexi-access drawdown was no longer going to happen. Other firms have also refused retired savers the chance to dip into their funds as often as they need, while others are charging huge exit penalties to clients who want to access money early. The problem is that many of these pensions were structured to pay out in 15 or 20 years’ time, so providers are charging large fees to cover the shortfall. It is expected that the government may step in and impose a cap on such exit fees.
Scams, risk and life expectancy
To add to the confusion, a growing number of unregulated firms are targeting over-55s with scam pension schemes. Kate Smith, Aegon UK regulatory strategy manager, said, ‘The new pension freedoms have given people far greater choice about how they access their pensions, but this has opened the door for scammers. We are seeing more and more sophisticated cases of unscrupulous people getting their hands on people’s retirement savings’.
The best advice is to make sure you are dealing with a firm regulated by the FCA and contact the regulator if you are uncertain. Those who have put pension money into savings accounts or invested in rental property are throwing away valuable tax advantages, subjecting their nest egg to pitifully low interest rates, the peril of inflation and risking everything by having all their eggs in one basket. Withdrawing big sums from pension savings means some people have unexpectedly moved into the higher-rate tax and have been taxed heavily for dipping too freely into their pension pots.
People with final salary pensions providing an income based on length of service and salary, have been encouraged to think carefully before they jump into transferring to a personal pension. The Pensions Regulator instructed providers to make sure that people moving a final salary pension of over £30,000 have consulted an independent financial adviser before any money can transfer out.
With growing life expectancy, pensions needs to work harder than ever. According to the Office of National Statistics, today’s average life expectancy of a man in the UK is 86.5 years and for a woman it’s over 90. The risk is your retirement savings will run out long before you die.
What’s right for you?
Everyone has different ideas about retirement. What is right for you depends on your circumstances. It’s important to review your pension savings and estimate the income you are likely to receive in retirement. If there’s a shortfall, the earlier you spot it the easier it will be to fix.
With some pension firms struggling to step up to the challenge of the new freedoms, you may have to consider moving your pension to a different provider to get the flexibility you need. But which provider? This is not something for the faint-hearted and most find the service of an independent financial adviser invaluable. Don’t be tempted to make rash decisions. Instead take independent financial advice to make sure that you are doing the right thing, both now and for the future, to ensure that your pension savings are able to support you through retirement. You can download a free guide to the pension changes atcswfs.co.uk/pensions
Chamberlain Stean & West are independent financial advisers who are appointed representatives of Tavistock Financial Ltd, which is authorised and regulated by the Financial Conduct Authority, FCA No 466922.