Have pensions freedom reforms (introduced in April 2015 by then-chancellor George Osborne) been good or bad for savers? The reforms – which make it easier to access your pension pot from age 55, or to keep it invested to generate an income, without having to buy an annuity – have proved very popular. But there are concerns from some that savers have fallen for scams, or have simply made poor choices, prompting MPs to investigate.
Since the reforms, more than £10bn has been withdrawn from defined-contribution (DC) plans (where you save to build up a pot that then funds your retirement, as opposed to a defined-benefit scheme, which promises a specific annual income in retirement). Most have kept this money invested, rather than just spending it, notes the Financial Conduct Authority.
However, the regulator questions whether savers managing their money like this understand the relatively risky nature of the approach compared with buying a guaranteed annuity – the latter may provide a lower income, but it removes investment risk from the scene.
Savers are also increasingly withdrawing money from their pots well before they turn 65, which is when most traditionally accessed their cash in the past. Another concern hangs over how well informed retirees are. Just 7% had used the free Pension Wise guidance service (figures on those taking advice privately are not available). Regulators also fear that con artists see the reforms as a gift – around £43m of savings has been stolen in the past three years, say police.
The Work and Pensions Committee will consider whether enough is being done to combat fraud, and will look at the availability of advice, potentially prompting recommendations for changes. We like the flexibility granted by the reforms, so we’d rather they stayed in place and consumers were better informed. In the column, we look at how to avoid scams.
How to avoid the scammers
Here are our main tips for avoiding the scam merchants.
• Hang up on cold callers. If someone phones you out of the blue claiming to want to discuss your pension or any other investment “opportunity”, then hang up right away. You don’t have to be rude about it, if it makes you feel uncomfortable – just say: “Sorry, I’m not interested and I’m hanging up now – thank you”, and drop the call, regardless of how persistently they keep trying to give you the hard sell.
• Similarly, ignore texts and emails from companies that you have no existing relationship with. Be particularly aware that many scam merchants steal elements from the names of well-known financial services or City companies in an attempt to sound more “official”.
• Watch out for emails purporting to be from your bank, the tax office or another financial company, asking you to enter your bank details, or to change the account number of any regular payments you are making – this is a classic scam. Phone your provider direct (obviously don’t use a phone number quoted in the email itself) to check before doing anything.
• Ignore anyone who says they can “unlock” your pension before you turn 55. They can’t, and if you try to do so, you could be subject to a 55% tax – that’s if you even see the cash.
If you think you’ve been the victim of a pension scam, call Action Fraud on 0300-123 2040, or visit ActionFraud.police.uk/report-a-fraud-including-online-crime.
Tax tip of the week
If your company has signed up to a cycle-to-work scheme, you can get a bike and cycling equipment worth up to £1,000 without having to pay upfront. As part of the scheme, you enter into a hire agreement with your employer to pay the amount back over, typically, 12 or 18 months, through monthly salary sacrifice. This amount is taken from your gross salary, meaning you pay less income tax and national insurance contributions overall.
At the end of the period you have the choice of returning the bike or buying it from your employer at its fair market value. Depending on what scheme your employer goes with, you may also be given the opportunity to rehire the bike for three more years, after which it becomes yours.
The Brexit threat to expat pensions
UK expatriates living elsewhere in the European Union may lose access to pension savings managed by UK providers after Brexit. Without new arrangements agreed as part of any Brexit deal, many UK pension providers will be unable to make pension payments to policyholders living in other EU countries, says the Association of British Insurers.
The warning has prompted fears that UK expats could be left without private pension income if there is no transition deal to preserve the passporting arrangements under which financial services companies in one EU member state are allowed to enter into contracts in any other country in the bloc. The same problem applies to a range of other long-term insurance plans, including commercial negligence policies held by many companies.
The issue has been taken up by the Treasury Select Committee, whose chairman has highlighted the problem as a particularly stark example of the potential consequences of a “cliff-edge Brexit”.
The Treasury itself concedes that no deal has yet been done to protect expat pension savers, but promised a full response “in due course”. By contrast, state pensions are now protected, with the government promising to continue paying benefits (plus annual inflation increases) to expats across the EU.