Three pension traps for the unwary

Not long now. By the middle of next week, most people hitting 55 will find themselves in a whole new world of choice. They’ll be able to pick and choose how and when to access their pensions.

They’ll be able to keep as much or as little as they like inside their pension wrappers; to invest in their own way; and, crucially, leave anything left on their death to their heirs entirely free of inheritance tax (IHT).

We look at the details of just how this all works here. But, as regular readers will know, it is mostly excellent news for the kind of people who read MoneyWeek – intelligent savers and investors.

I say mostly for the simple reason that there is no end of danger in these reforms. Why? First, because it comes at a difficult time for the markets. Anyone looking to make the most out of pensions freedom will want to use some kind of income drawdown system to maintain their lifestyle. But income isn’t easy to come by these days.

UK interest rates remain at rock-bottom lows. In several countries in Europe rates are actually negative. And the increasingly desperate search for yield means that almost any asset offering one (be it a buy-to-let property, a corporate bond, or a dividend-paying equity) is rather more expensive than it should be.

That leads me on to the second great danger ahead: criminals and the financial industry. Nothing excites the criminal fraternity more than the knowledge that thousands of people are about to have access to large piles of cash they aren’t entirely sure how to squeeze an income out of. So we must all be ready to see off no end of cold-calling scammers offering a variety of weird and wonderful ways to make an easy 6% in a 0.5% world.

However, it’s also true that nothing excites the super-profit-seeking instincts of the financial industry more than those same piles of cash in those same inexperienced hands. So even once the over-55s have (hopefully) seen off the various illegal schemes working to take all their cash at once, they will have to keep their guard up: some of the best brains in Britain are currently hard at work thinking of high-promise, high-fee products to flog to the newly cash-rich.

It’s all beginning to sound less fun, isn’t it? It gets worse. There’s a group in the UK that we need to be even more financially frightened of than we are of the mainstream financial industry. The government.

None of our main parties have any intention of trusting us with a frank statement of just how broke we are. But broke we are. That means that either state spending has to fall (no chance), or the tax take has to rise. The still generous tax breaks on pensions (from the old income-tax reliefs to the new IHT reliefs) don’t fit well with that scenario. Best not to get too used to them.