Rip-off peril of cashing in your pension
A NEW generation of savers is in danger of being ripped off in retirement after the introduction of radical pension freedoms, a report warned yesterday.
The City watchdog raised fears that hundreds of thousands of baby boomers may have already switched into poor value pensions.
The pension freedoms – introduced by George Osborne in April 2015 when he was chancellor – allow people to cash in their entire pension from the age of 55, giving them more choice over what they do with their savings.
This means savers are no longer forced to lock their retirement savings away in a poor value annuity when they retire.
But in the first detailed appraisal of the £615billion market since the reforms came into force, the Financial Conduct Authority said it is worried that savers face a new threat.
Its report said accessing pension pots early has become the ‘new norm’, with almost three
‘Paying too much tax’
quarters of pots accessed by people under the age of 65.
More than one million people have withdrawn a total of £10.8billion from their retirement funds since April 2015 – an average of around £10,800 each. Many have cashed in their entire pension pot.
But the watchdog is more concerned about the huge increase in the number taking out risky income drawdown pension policies without receiving any advice. These allow savers to keep their pension fund invested, while drawing an income.
The FCA said twice as many pension pots are now being moved into these plans as into annuities, which provide a guaranteed income for life.
Although they can be suitable for some savers, the proportion of savers taking out these com- plicated plans without advice has risen from 5 per cent before the freedoms were introduced to 30 per cent.
The FCA raised concerns that almost all of these savers are simply piling into the plan offered by their existing pension provider rather than shopping around for the best deal.
It said the lack of competition means these savers are more likely to pay higher charges or receive a ‘lower quality’ plan.
Gareth Shaw, from consumer group Which? said: ‘The annuity market failed pensioners in the past. The FCA must now use this review to ensure that similar mistakes are not made with income drawdown products.’
The FCA said that even charges on the simplest drawdown products are ‘too complex to navigate’ and said the more complex products carry 13 different charges on average.
Justin Modray, a pensions expert from Candid Financial Advice, said some insurance companies will charge £1,500 a year or more for savers with £100,000 in a drawdown policy.
The FCA is also worried that almost a third of those who have accessed their pension have simply switched their pension pot into current accounts or cash Isas, which pay little or no interest. It said this could result in savers ‘paying too much tax, missing out on investment growth or losing out on other benefits’.
The FCA is looking into providing extra protections for consumers. It aims to publish its final report next year.
Huw Evans, director general of the Association of British Insurers, said its own data does not support the view that accessing pension savings early has become ‘the new norm’.