Fresh fears for savers who cash in pensions

SAVERS risk running out of money in retirement due to a surge in families investing their pension pots without advice, a top boss warns.

Phil Loney, head of savings firm Royal London, said more retirees were putting their money into drawdown products with no understanding of the risks.

Traditionally, savers used the money in their nest egg to buy an annuity which guarantees a set amount of income for life.

But pension freedom reforms introduced in 2015 gave the option of spending cash – with then-pensions minister Steve Webb even saying they were free to blow it on a Lamborghini car.

With annuities hugely expensive due to record-low interest rates, thousands of people are opting for drawdown instead.

In the first year, around 90,700 savers invested £6.1bn in drawdown products – an average of £67,500. This means savers keep their cash invested and earning interest, but gradually spend it over the course of their lifetime. The idea is to die just as the final money is being exhausted.

For those who get it right, their income can be much better than an annuity but investing wisely is extremely complicated.

Getting it wrong could mean that savers run out years too early and face destitution.

Loney said it was ‘concerning’ that many people were ploughing ahead without taking advice.

He even suggested that rival big pension firms were encouraging people to do this – potentially opening the door for a future misselling scandal.

‘The best outcome for customers when choosing an income drawdown strategy generally occurs when they take financial advice, as the decisions are complex and can form a significant part of an individual’s retirement income,’ he said.

It follows repeated high-pressure sales tactics to sell annuities in previous years.

In February, Standard Life and Prudential said they would compensate up to 200,000 ill pensioners who were sold unnecessarily expensive annuities intended for people likely to live longer.

And in June, the Financial Conduct Authority launched a crackdown on advisers telling workers to cash in lucrative defined benefit pensions, which offer the most secure long-term way of saving.

Loney said the FCA was paying close attention to the drawdown market, and his business was launching a service for customers who were not being advised.

It came as Royal London revealed it had written £6.1bn on new life and pensions business in the first half of 2017, up 45pc on a year earlier. At its investment division, funds under management climbed 6pc to £106bn.

Prepaid-funeral plans were a key growth area, up 41pc.