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Cautious approach to pensions freedoms

The new pension freedoms bring opportunities, but also potential dangers for savers in light of the flexible withdrawal rules. As with most financial planning decisions, careful and well-thought action is required.

Before the Budget last year, savers could take 25 per cent of their pension pot as a tax-free lump sum and any remaining funds would typically be spent on an annuity, which would provide a guaranteed income for life.

From next April, regardless of the size of an individual’s pension pot, 25 per cent will be able to be taken tax-free, and the balance is expected to be able to be drawn from the pension fund as necessary, but taxed at the individual’s marginal rate.

A recent Dispatches programme aired on Channel 4 revealed that ahead of the windfall of £6bn of cash expected to be withdrawn from pensions after April, savers are being targeted to invest in obscure investments, such as parking bays in the Middle East and self-storage units.

As might be expected the media has focused on the fact that the new rules allow people to take the money out of their pension pots as early as age 55 and there have been headlines predicting pension pot cash will be “frittered away” on luxury items or lifestyle improvements.

Our experience is that the majority of people are far more sensible with their money than such media outlets give them credit for. The impact and significance of the changes are yet to be fully realised by many people and as we rapidly approach 6 April, we can expect considerable focus on what is the right course of action for people to take.

With the potential for billions of pounds to be accessed and moved into other savings products and investments – or simply spent – one sure thing is that there are unscrupulous people out there who will have no qualms in duping or defrauding people of their life savings in order to line their own pockets. The general risk of this was exposed in the Dispatches programme with callers trying to sell esoteric investments.

Most people will need to use at least part of their pensions for income in their retirement years and the new freedoms increase the options available to them. Not surprisingly, we are seeing savings and investment providers responding to the changes by designing legitimate new products to help people make the most of the new freedoms to suit their particular circumstances.

At Lowes Financial Management, using our specialist pension expertise, we will be carefully scrutinising the new products that come to market, through those legitimate channels, designed to cater for the new pensions freedoms, to find the appropriate solution for each client’s individual needs.

Should you, your family, friends and neighbours receive approaches to switch your pension funds into a ‘new’ scheme or product, then even if a product or investment looks reasonable, our advice is that no-one should be tempted into withdrawing their pension money and putting it into any product or scheme without taking proper Independent Financial Advice.

As part of our efforts to help people understand the pension rules and work out what they need to do next, we have produced a free pension eBook, which can be downloaded here.

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