Pension freedom: counting the cost
More people are accessing their pension fund, but how can you protect against fraud?
It has been more than three months now since massive changes to pensions came in, giving anyone over the age of 55 far more freedom to choose how they use their retirement savings. Retirees can now opt to buy a set lifetime income in the form of an annuity, take income while keeping most of their pension invested, or take lump sums as and when they want. So, what have people been doing?
Research from the Association of British Insurers (ABI) found the number of people buying annuities has significantly decreased. This will come as no surprise to most people as the meagre rates offered on these policies has made them a far from appealing retirement income option for many years.
The ABI said in contrast more than £1.8bn has been withdrawn flexibly from pensions since the rule changes came into force in April.
A popular choice among those with sizeable funds has been to keep savings invested and take a regular income. Investment firm Hargreaves Lansdown reports that income drawdown, as this is known, was chosen by 77 per cent of its customers in the 100 days after the changes. According to the ABI £800m has been taken through income drawdown since April.
There were also a huge number of lump sum cash withdrawals, especially among those with smaller pot sizes. The ABI reports that more than £1bn was taken in 65,000 cash withdrawals, averaging £15,500 each.
"The data shows people with smaller pots tend to be cashing them out while those with larger pots tend to be buying a regular income product," says Dr Yvonne Braun, ABI’s director for long term savings policy. "It also highlights an increase in the number of people putting money into income drawdown products that can take advantage of the new freedoms."
Watch out for Scam Artists
But while the bulk of pensioners appear to be handling the big pension changes well, there has also been a worrying rise in the number of pension scams.
Action Fraud report that the number of reports of pension 'liberation fraud' had more than tripled in the first 30 days after the new pension freedoms came in. Those frauds led to a loss of £4.7m in May, compared to £1.4m in April and £932,000 in March.
Pension liberation scams involve a fraudster contacting someone with a pension and telling them they can release their money, for a fee.
What they fail to mention is that there could be a hefty tax bill to pay if funds are accessed before retirement, as HMRC treats early access to tax-relieved funds as an 'unauthorised payment' except in certain circumstances, such as extreme ill health, triggering a 55 per cent charge. On average victims lose £60,500 in these scams, partly in tax and partly in fees to the conman.
Avoid becoming a victim of a scam by taking these steps:
- Never tell a cold caller any financial information about yourself.
- If you are contacted by a company check whether they are registered with the Financial Conduct Authority before dealing with them.
- Always seek independent financial advice before deciding to withdraw money from your pension or transfer to a new pension provider.
- Take your time. If a company or individual is pressuring you to make a decision that should raise a red flag.