Pension Freedom - The Next Big Scandal?
In 2015 the Government granted people the freedom to access their pension funds in full once they turn 55. Since then thousands of people have done so, but regulators are worried that we could be in the middle of a new mis-selling scandal, and it's becoming more difficult to find sound advice as financial advisers fight shy of this risky area. What's all the fuss about? Let's hear from Andy Jervis on the matter...
Over 30 years of advising clients, I've found that their pension plan is likely to be their biggest financial asset. The latest published data from the Office for National Statistics backs this up, confirming that pensions are the biggest component of family household wealth in the UK, comprising 42% of the total and significantly greater than property values which comprise 36% of total family wealth.
The reason why, for most people, the majority of their financial wealth sits within their pension plan is quite simple... It's because they haven't been able to get at it.
That's right. The reason that puts many individuals off from pension investing - it's inaccessibility - is actually its best feature. People can't spend their pensions and, when left to increase, the value gradually accumulates into substantial investments. The needs of the day - new car, new sofa, new dog, new child - mean that other savings are systematically raided before they have time to put down roots and grow into meaningful sums.
The situation is complicated by the way in which some pension schemes work. If you have a 'final salary' pension plan you don't have a pension fund as such, but you do have an entitlement to a pension at a specified date in the future. For many years it has been possible to transfer the value of this future pension entitlement to another scheme. To enable this scheme administrators have to calculate the 'cash equivalent' value of the pension. Part of the work of financial advisers has been to tell people whether this 'cash equivalent' represents fair value, and whether they will be able to achieve the same or better amount of pension by transferring it.
Until recently the main choice was whether you should stay in the current scheme and draw your pension from there, or move to a new scheme and arrange for it to pay your pension instead. Whilst there are many factors to consider in this decision, it was often a straight choice between one pension scheme or another.
Since 2015, however, there's another option on the table. Now you don't have to decide which pension scheme to move to, instead you can elect to withdraw the whole lot at once.
So suddenly the reason why you had such a sizeable fund in the first place meets your daily desire for cash. You need to be over 55 to access your pension, so maybe the new child isn't going to soak up your cash, but after a lifetime working hard it's time you rewarded yourself with a bigger car, a cruise, a new conservatory.... the list goes on. The things you can buy with your money will forever exceed your ability to pay for them.
Of course, many people will recognise that they need to keep some cash set aside for the future, and will make good and prudent decisions with their pension fund. But for someone on a relatively low income, the ability to withdraw tens of thousands of pounds is like winning the lottery. It's a temptation that's hard to resist.
The problem is that most people significantly underestimate their likely lifespan and their consequent need for future cash. Trying to plan your expected needs in 20 or 30 years time is probably a job best left to actuaries.
This is a time when people need great advice. It's also a time when the vultures of the financial world sense rich pickings.
There have been plenty of scams designed to part people from their pension funds, but there are also questions about the independence and impartiality of the many 'pension advisers' active in this market. With charges often as high as 5% or more of the transfer value, there's a big incentive for firms to recommend a transfer, whether or not it makes sense to the pension owner.
That's why the regulators are concerned, and it's why you should approach this area with extreme caution. Be very wary of offers of 'free' pension advice, and be prepared to pay a realistic professional fee for sound advice. Think carefully about your future needs before you consider raiding your pension, and don't forget that the taxman could take a large bite out of your fund if you don't plan your withdrawal strategy carefully.
There are some great, objective advisers out there who can help you to understand the options and work out what's best for you. It really does pay to make use of their advice.
Written by Andy Jervis
Certified Financial Planner & Chairman of Chesterton House