Published On: Tue, Feb 13th, 2018

Retirement poverty is REAL: FCA to discourage savers from pension raids – experts’ views | City & Business | Finance

Savers looking to “unlock” pensions and withdraw money will now be shown the amount they can “safely” take from their pots without risking of coming up short in retirement. 

Under plans disclosed to the Sunday Telegraph, savers who ignore the warning and withdraw large chunks of money will be asked to tick a disclaimer box to confirm that they understand the risks involved according to the plans.

Express.co.uk has spoken to a number of leading pension experts on how pension freedom has worked since it was introduced, and what the worst-case scenario is once reckless savers drain their pot.

Chris Knight, CEO of retail retirement, Legal & General, says granting pensions freedoms was a huge step for the industry and savers. He said the flexibility provided to consumers has certainly been a good, however it’s very unlikely to ever be in a customer’s best interest to withdraw the whole of their pension pot in one go.

He said: “Freedom and choice are great things – it’s the customer’s money after all. But the golden rule still applies: you can only spend it once.

“There are also continuing concerns that people could be sleepwalking into drawdown. This may not be the most cost-effective option for them and it can leave the individual exposed to unwanted investment risk.”

On the plus side Mr Knight says for most retirees, having the ability to draw income throughout their retirement, rather than accessing their entire pot in one go, will ensure they have the ability to meet their needs as they get older.

But with fraud and cases whereby pensioners have been given bad advice, Mr Knight says that the FCA working with The Pensions Regulator to tackle pensions risks over the next 10 years is welcome news.

He said: “Trust in pensions has been undermined in recent years as a result of miss-selling scandals, people falling foul of fraudulent schemes and individuals losing significant amounts of their retirement savings from high-profile corporate failures such as BHS. 

“It is beholden on all of us in the industry to work hard and long to re-earn that trust.”

Progressive Property, Mark Homer is dubious about the move and says that pension companies will always try and discourage those from withdrawing as it harms their commissions and fees.

However, Mr Homer champions “robust FCA approved advice” as the safest route to achieving good pension returns for UK savers.

The Cameron government’s decision to allow savers to raid their pension pot carries a certain amount of cynicism over the short-term tax boost such an initiative would bring.

Nigel Pullen, Financial Planning Unit Manager at Wesleyan, told Express.co.uk with only 25 percent of the total amount you withdraw is tax-free, the remaining 75 percent is considered to be taxable income.

He said: “This can result in a hefty tax bill if you’ve built up a generous retirement fund over the years.

“On top of this, most pensions are invested for the long-term and withdrawing early could mean that you lose out on the potential those investments could generate.”

Phil Blows, director at Wealth Wizards says retirement poverty is a very real outcome for many employees who neglect their savings.

He said: “Many employees will find that they simply cannot afford to retire and will be working into their eighties to supplement the state pension.

“This will put pressure on employers who will find basic benefit costs will increase in in line with the age of the workforce. There will also likely be fewer opportunities for younger generations to enter the workforce.”

Jamie Smith-Thompson, Managing Director at Portafina adds that the FCA have highlighted some real horror stories of people taking their entire pension as cash, being taxed on it, and then putting what’s left in the bank.

Mr Smith-Thompson says that because of the large sums of money in people’s hands, the Government’s move has presented an opportunity to “scammers” looking to get their hands on people’s pensions.

He tells UK savers to make sure you always deal with a company that’s FCA regulated.

Andrew James, head of retirement planning at Tilney, says education is the key in this area. However, he criticises the Cameron government’s haste in pushing the legislation.

He said: “It is a shame that a good piece of legislation like pension freedoms was bought in so quickly without the time to consider the overall impact of the changes and how to address the need for greater understanding of all the factors surrounding a retirement decision.”

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