Rip-off risk of cashing in pension pot early

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 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More than one million people have withdrawn a total of £10.8billion from their retirement funds since April 2015 – an average of around £10,800 each.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 complicated plans without advice has risen from 5 per cent to 30 per cent.

The FCA raised concerns that almost all of these savers are simply piling into the plan offered by their existing provider rather than shopping around It said lack of competition means these savers are more likely to pay higher fees or receive a ‘lower quality’ plan.

‘Failing to shop around’