How to avoid pension drawdown rip-offs
Pensions freedom has overwhelmed some savers, says David Prosser. But new rules are on the way.
Tens of thousands of savers may have their money invested in expensive and inappropriate retirement products, says the Financial Conduct Authority (FCA). Those who have opted to use income-drawdown plans in retirement may not have made the best choice about how to invest their money.
The warning follows the latest stage in the FCA's investigation into how the market is evolving following the pensions freedom law of April 2015. This allowed retirees to draw down an income straight from their savings, rather than buy a guaranteed income with an annuity.
Drawdowns have since proved hugely popular, but have some serious flaws especially for the third of savers who enter into such plans without taking independent financial advice.
A key problem is that 94% of non-advised savers simply opt for the drawdown plan on offer from the company with which they built up their pension cash, instead of shopping around for a better deal, the FCA warns. A third of non-advised savers hold their drawdown funds in cash, rather than investing the money for future growth. Yet the whole point of drawdown is to allow savers to go on building up their pension funds even after they begin deriving an income from them. A cash fund is far more likely to run dry during retirement.
The regulator also warned that drawdown plans were often overpriced. The FCA identified 44 separate types of fee levied across the market. The most expensive plans are four times as costly as the cheapest alternatives, with annual charges of around 1.6%, compared with 0.4% at the most cost-effective providers.
Too much choice
The warnings highlight an ongoing issue with the pensions freedom reforms some savers are taking advantage of the additional flexibility, but for many others the choice has proved overwhelming. Those unwilling or unable to pay for advice are losing out.
The FCA is now mulling new rules forcing pension providers to issue savers with clearer information before they choose how to cash in their savings. This could include a requirement to encourage savers to shop around, while savers would have to choose cash funds deliberately rather than being placed in them as a default option.
The regulator may also insist on "investment pathways" standardised approaches to drawdown that savers could opt for if they aren't receiving any independent advice.
Cold-calling ban is still on hold
More than 18 months after ministers promised to introduce a ban on cold calling by salesmen pitching pension products, the regulation required to underpin a change in the law has been delayed again.
The government originally promised to ban unsolicited marketing and sales by pension advisers in the 2016 Autumn Statement. There was widespread concern that the pensions freedom reforms had facilitated a huge increase in scams and frauds.
But while the proposals have all-party backing as well as the support of pension experts, the ban which would apply to phone calls, text messages and emails has repeatedly been delayed by a lack of parliamentary time.
In the latest hold-up, time has run out to introduce the regulation before parliament's summer recess, with ministers now planning to issue rules in the autumn rather than putting them in place this month as previously promised.
Former pensions minister Baroness Altmann described the delay as "disappointing". "Anyone who receives unsolicited approaches offering help with their pension should steer well clear," she warned. "Official or bona fide firms will not call you out of the blue, and those friendly sales people could cost you much or all of your pension."