Pension Freedom is a Real Worry


Pension firms have been ordered by the City watchdog to issue serious warnings to their respective client bases regarding the new pension freedoms they are to be afforded in April. The concern is that once the door is opened for savers to take their entire pension in one go, many of them will choose to do so, leaving themselves subject to falling unwittingly into a higher tax bracket (based on inflated annual income).

It is also feared that a whole new breed of scammer may be able to gain access to those who have decided to take 100% access, and coerce them into some kind of get-rich-quick scheme. Pension scammers (such as the liberators) have the added danger of being specialists in targeting the most vulnerable, and they will caertainly be circling like vultures come April.

And finally, perhaps the most pressing concern, is that the majority will most likely get the dream Mediterranean cruise, the convertible Ferrari, or the lifetime membership at Wentworth, and find that once they need that all-important medical procedure, or some kind of specific care later on in life, they will have no way of affording it, and the state will have to come to the rescue – if it is able to.

FCA Orders Warnings

The worries extend to such an extent that the FCA has issued an order to all providers that they must not only explain the potential pitfalls of treating a pension like a bank account, but they must also suggest clients familiarise themselves with the government guidance scheme, Pension Wise. The scheme offers advice over the phone or face-to-face, and is designed to make savers think very carefully before committing to a decision which is irreversible in many cases.

The 100% access rule could result in up to an additional £6 billion being withdrawn from pension pots than normal in one fell swoop, and pension providers are bracing themselves for the worst. Not to say that any one provider would be likely to actively discourage 100% withdrawal, but for certain institutions, if the advance warnings and ‘food for thought’ offered to clients, manage to limit the appeal of the new freedom, it would probably be quite convenient.

Polls suggest that up to 83% of defined contribution scheme holders (the only savers the freedom is extended to) are seriously considering withdrawing their pension in full and investing it in a way they see fit.

If 100% withdrawal is of appeal, one might be wise to take the option as soon as possible, as the likelihood of the Tories remaining in power when the General Election happens (just one month after the reforms kick in), seems to be diminishing by the day. Would a Labour government be more inclined to impose their own legislation on the pension system and do away with some of the new and controversial reforms? We can only wonder at this stage

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