Member Article

Don’t get swept up in pension reform freedoms

A firm of finance experts is warning people not to get swept up in the excitement of the “pensions revolution”, when the next wave of new freedoms come in from April.

Amidst the claims from the government that the reforms to the State Pension will make saving for retirement much easier to understand, independent financial planning firm Gale and Phillipson is calling for people to be wary about dipping into their pension pots without seeking advice from an expert.

Phil Morris, head of distribution at Gale and Phillipson, said: “We are in the middle of a ‘pensions revolution’ and the Government is in the process of delivering the biggest pension reform for decades. With more than three million people in the UK saying they lack any form of retirement plan, it is important that people fully understand what it means to prepare for their retirement and understand what they can expect to receive in their Golden Years.”

“The new freedoms have opened up many more options for those approaching retirement, but just because those options are available, it doesn’t mean taking them up is necessarily an attractive option or the right thing to do.”

The Government recommends that people continue to top up their state provision with a private pension, and to date Automatic enrolment has seen more than 5.6 million people start saving into a workplace pension. However, many studies have shown that British people are not putting enough away to provide them with a decent standard of living after retirement.

Although there may have been high expectations of extraction of cash from pensions, in actual fact, for those with a pension pot, over £4.7bn has been extracted from pension funds since April 2015. This amounts to 2% of overall pension funds, with the average amount withdrawn in a lump sum being around £15,000.

Perhaps even more concerning though, is the amount defrauded by pension scams over that same period has risen from £1.4m to £4.7m - a 235% increase.

Phil said: “Since the pension reforms in April, people may have lost hundreds of millions of pounds through costly mistakes with the way they manage their retirement funds. On top of that we are seeing increasing numbers of people falling prey to scammers, offering inappropriate, high risk and often illegal investments.

“60% of people extracting funds from their pension pots are under 60, with 80% under age 80, which can mean people are losing out when they are right on the cusp of reaching retirement age.

“Many of the scam offers seem very convincing, starting with offers of excellent returns and fraudsters often approach their victims through cold calls, sometimes even claiming to be ringing from the Pension Advisory Service and other agencies. If you transfer your money into a scam, you could end up losing all your pension savings and in some cases facing a tax bill of up to 55% from HMRC.”

Experts are keen to point out that ‘doing nothing’ may not be the best option either. It depends on personal circumstances.

Phil said: “There’s a lot to weigh up when considering whether to transfer your guaranteed pension. The Government has said that ‘for the majority of people, but not all, it will remain in their best interest to stay in their defined benefit scheme.’

“However, the pensions reforms bring about a new level of flexibility and choice. For some, an annuity may still be the right option. Others may want to withdraw their entire tax-free lump sum and convert the rest to drawdown.

“We’re seeing many people wanting to leave some of their pension pot for their loved ones after they die. This is not possible with some pension policies, so you may find you need to move your money in order to do this.

“People who want to buy an annuity are also losing out by failing to shop around for the best deal, instead going for what they see as the ‘simple’ option through their pension provider. It’s essential to obtain the right professional financial advice to ensure that you access your pension safely, without unnecessary costs and a potential tax bill.”

“Retirement should be an exciting time, and these days there’s now more scope than ever to arrange your finances the way you want them. For example, you could continue to work and take your pension benefits. That flexibility is great, but it comes with a new level of personal responsibility that means the financial decisions you make need careful consideration. What is crucial is that you approach withdrawing your money in an informed and tax-efficient way.”

This was posted in Bdaily's Members' News section by Gale and Phillipson .