British retirement savers should beware of financial sharks as companies look for new ways to attract their cash after the government’s radical pension overhaul.
Insurers and wealth managers fear pension savers will seek high return investments to try to make more of their cash – and that plenty of unscrupulous firms and advisers will set up shop to grab a share of the money.
One survey, by American fund manager State Street revealed a fifth of insurance executives are worried that the UK will be flooded with a wave of unsuitable investments after April 2015.
That’s the date when government plans to allow over 55s easier access to their pension funds, effectively giving them the chance to withdraw and spend the money how they wish.
“More than half of insurance executives expect the UK market to see new alternative investment firms in the market place from next spring,” said a State Street spokesman.
Unsuitable alternative investments
“They are concerned about unsuitable investments mopping up cash that previously went into annuities.
“The fear is that promises of high returns beyond those which annuities could offer will be too attractive for many retirement savers who want to make more from their pensions.”
The result, says the report, is profits for firms involved in providing products and planning for retirement will plunge.
State Street says several financial firms are already cutting jobs and revamping products and services ahead of the April 6 D-Day for pensions.
Financial executives predict that although annuities will fall further from grace because of poor returns, alternative products promising capital or income guarantees will be marketed to take their place.
Tax and high fees warning
“These products will be expensive and come with high fees because any promise of a guarantee needs a lot of financial backing,” said the spokesman.
Another asset class backed as a winner after April 6 is residential property. These could take the form of investment backed funds or equity release as retirement savers look to free up cash locked in their homes once they have drawn down their pension funds.
Other fears for insurance firms and financial planners include retirement savers failing to consider the tax implications of drawing large sums of money from their pensions, which could slice up to 40% off any lump sums once the first tax-free quarter of the fund is taken.
