Pension freedoms: is there a scandal on the way?

Many older people are in danger of finishing their lives destitute as industry players warn of a pension scandal brewing.

It is now four years since the pension freedoms were introduced. 

And while thousands of older people have made use of the ability to have more say over how their pension pots are managed and accessed, new research commissioned by Age UK has raised concerns that many older people are in danger of finishing their lives destitute.

The report writers interviewed specialists across the pension industry and came to the conclusion that many older savers are being pushed into making complex decisions about how to handle their pots without receiving proper advice or support, with a lack of appropriate deals from which to choose.

For example, it seems that a lack of innovative thinking over how to help those savers with small- or medium-sized pots has meant they do not have much in the way of value-for-money products to choose from, nor the tools they need in order to manage their money effectively.

Given that one of the big selling points of the freedoms was supposed to be that pension savers with smaller pots would have more options in terms of how they accessed and put their money to use, that seems like a particularly concerning development.

Your complete guide to pensions: from first contribution to your options in retirement

The cost of getting it wrong

Let’s be clear, while any pension mistake can be costly, making a hash of your pot now that savers have more say over what happens to their cash can be far more damaging financially than ever before.

A good example here is the tax liability that comes from withdrawing money from your pot ‒ withdrawals are taxed at your marginal rate of income tax, but taking out too much can result in you moving up an income tax band and therefore having to pay more to HMRC.

This would be less likely to happen if older people were getting advice over the best ways to manage their pension pots in the post-freedoms world, but this is yet another issue. Huge numbers of savers are moving into drawdown deals without making use of a financial adviser.

Do they really understand what they are signing up for? Or are they in for an unpleasant shock?

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A scandal is on the way

It’s also notable that Age UK reported that many of the experts it interviewed in producing the report were concerned that there will be some sort of scandal relating to the freedoms which will emerge over the coming years.

The most likely uproar would be in the event of a market downturn, which could hurt pensioners in two distinct ways.

One set of savers may simply not fully grasp the risks that come with keeping their cash invested, and drawing down an income from it, with a downturn resulting in the size of the pot at their disposal dropping in size.

However, there’s another group of savers who may have opted to invest their pension pots into assets that are perhaps not as appropriate for people in their position. And if the market wobbles ‒ and let’s be honest, with Brexit on the way, who knows what the market is in for ‒ the value of those investments could easily crash.

The financial regulator reckons that around 90,000 pension savers may be in danger of running out of money if they don’t amend the sums they are withdrawing from their pots already.

Just think of how that figure would rocket should the economy hit the rocks.

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Don’t forget the scams

Of course, that concern is separate from the fact that the pension freedoms have been an incredible opportunity for scammers.

Thousands of savers have been sweet-talked into transferring their hard-saved money into dodgy investments, likely losing the lot, and that has all been made possible by the additional freedom we now have over exactly how those pension pots are handled.

This has only been helped by the disgraceful way that the government has dragged its feet over getting serious about a proper ban on investment-related cold calls. 

Last year alone around £200 million was lost in pension scams. Without more concrete action from the authorities, that figure is only going to grow further in the years to come.

Putting things right

Giving people more freedom over how their pension pots are managed was a welcome move; the issues arise from the way it has been implemented and overseen.

As such, there is still time to put in place greater protections for savers to ensure they aren’t making damaging decisions with their money.

Much clearer warnings on what tax people will have to make on their withdrawals, as well as steering them towards tapping into some form of advice, would make a big difference.

Age UK suggests that there should be a cap for charges on income drawdown deals to ensure that savers are not ripped off, noting that as things stand it is too difficult for them to understand and compare total charges between different products.

This is just a ridiculous position to be in ‒ the freedoms have inevitably made drawdown a more attractive option, but failing to force providers to signpost the potential costs of these deals is indefensible.

Another welcome suggestion from Age UK is for pension providers and the FCA to provide savers with more guidance over what is a sustainable withdrawal rate, with a traffic light system to help highlight the dangers of taking out too much cash.

This would be a valuable way to provide savers with a helping hand on budgeting in my view.

Finally, it’s worth remembering that the freedoms have resulted in the annuities market taking an enormous kicking. Yet for many savers, the certainty provided by annuities is still the most sensible option for how to manage their money in retirement.

Age UK is right to call for greater measures to push people to shop around for annuities and even switch between deals.

It notes that in Chile they have an annuity clearing house, which helps savers “maximise their income and prevent them from being defaulted into a poor product”.

The truth is that drawdown as a default isn’t going to be right for huge numbers of savers. More freedom is great, but plenty of us value the certainty that comes from an annuity.