More and more people are making use of their pension freedoms but they’re facing greater risks too.
In the first quarter of 2018, pension transfers totalled £10.6 billion, a new record figure, according to the Office for National Statistics (ONS).
To put that into perspective: in 2016, one year after the pension freedoms were first introduced, transfers only amounted to £2.4 billion.
The majority of these transfers are probably coming from people who leave their guaranteed defined benefit (DB) schemes – which would have provided them with an income for life – in favour of more flexible but less secure defined contribution (DC) plans.
Tom Selby, senior analyst at AJ Bell, comments: ‘We have witnessed a perfect storm for DB transfers in the UK, with a combination of the attractiveness of the pension freedoms, high transfer values and headlines about high-profile companies – most notably BHS and Carillion – going bust all undoubtedly influencing people’s decision to exit.’
He argues that over time pensions transfer volumes should edge downwards as the number of people with significant funds eligible for a transfer diminishes. But he cautions that those who have decided to move their pot away from the security of a DB scheme ‘will now need to take a much more active role to ensure they get the retirement they want’.
Those who transfer out of a DB scheme also need to bear in mind that they face new risks. These include being misled by unscrupulous advisers who recommend unsuitable, overly risky investments. Fraudsters also target people who have transferred out of DB schemes, and in fact often encourage them to do so.
One in five financial advisers (20 per cent) identified the threat of scams as the one issue most likely to reduce savers’ support for pension freedoms, according to new research by Prudential. The insurer found that the same percentage regard investment market downturns as the biggest issue.
Vince Smith-Hughes, a retirement income expert at Prudential, says: ‘Fear of falling victim to pension fraudsters is a major issue for retired people. Savers are having to take greater responsibility for ensuring their retirement funds last the rest of their life, and there is a risk they pick the wrong type of investments or fall foul of fraudsters who promise a high level of returns.’
Therefore, he argues: ‘High-quality financial advice is good value for money. It will provide people with a financial plan for retirement, help them select the right type of retirement plan, and also avoid fraudsters and inappropriate investments.’
Those with smaller pots can also use the government’s free guidance service, Pensionwise, before deciding whether to seek financial advice.
TOP TIPS FOR IDENTIFYING A PENSION SCAM
- Ignore any contact you receive out of the blue about your pension. This could be in person, online, on the phone or in the post.
- Watch out for any promotion offering you more than 8 per cent return on your pension investment.
- Be wary of any offer to access your pension before 55. Accessing your pension early can mean you are hit with a high tax bill of 55 per cent, as well as losing any pension savings in a scam.
- Don't feel pressured to make a decision about your pension straight away; instead, take your time.
- Watch out for extravagant-sounding investments based overseas.
- Check the FCA online register to make sure the company approaching you is legitimate. Anyone giving financial advice should be registered.
- If you are making an investment, check the FCA ScamSmart warning list for known investment scams.
- If you are transferring a pension, ask your current pension provider to check the HMRC registration of the new scheme to check it is legitimate.