Pension Clinic: customers need proper protection, as well as the new guidance

Each fortnight in her exclusive blog for Money Observer, independent pensions expert Dr Ros Altmann will help you understand more about how pensions and savings work, and help you become a better-informed investor. She will also take a piece of industry jargon and explain it for you in plain English.

The pensions revolution is underway, with new freedoms and flexibilities for people over age 55. This is a tremendous opportunity to ensure you get the best out of your hard-earned savings, but the landscape is new and potentially confusing, so how will you decide what to do?

To help you navigate the complex pensions landscape, the government has promised free, impartial financial information and guidance as you approach pension age.

This new service has just been officially named, it's called 'Pension wise - Your Money, Your Choice', which aims to act as a pathfinder to help you on your retirement journey, offering financial information, but not regulated advice.

The pensions industry has taken advantage of poorly informed customers for far too long and the free guidance offers an opportunity to improve financial awareness and redress the balance somewhat.

Web, phone, face-to-face

'Pension wise' will have a dedicated website giving online guidance, as well as individual telephone guidance sessions run by The Pensions Advisory Service (TPAS) and face-to-face individual guidance sessions from Citizen's Advice Bureau (CAB).

TPAS and CAB are hurriedly recruiting new staff and will be running pilot schemes before April to learn what works best for pension savers. You can register now, which may enable you to take part in the pilots.

The government intends to build 'Pension wise' into a strong, distinctive, trusted national brand. There are only a few weeks to go before the freedoms begin, and it is essential to get as much help as you can before making any decisions about your pension, but not many people have heard of the guidance.

The government needs to launch a broad publicity campaign to explain what it is, and encourage people to use it. It won't be enough to rely on pension companies to tell you about 'Pension wise'.

What do you need to know?

'Pension wise' needs to tell you about the 3Ts. To make properly informed decisions, you'll need to understand the 3Ts.

Timing

Is now the right time for you to take money out of your pension fund, or should you just leave it invested?

Many people have been buying annuities far too young, even when they are still working or have other pensions, so the 'do nothing' option of delaying the start of your pension could be a good decision.

Tax

Keeping money in your pension fund has significant tax advantages, while taking it out could incur big tax charges. All income and gains in a pension fund are tax free and pensions will now also be free of inheritance tax too, so they can pass tax-free to your loved ones if you don't use the money yourself.

If you withdraw large sums from your fund, the money you take out is treated as your income for that year and, therefore, you could push yourself into higher-rate tax and lose 40 or 45 per cent in tax.

Type of product

If you do need to withdraw some money from your pension fund, or need regular income, you must find the most suitable product for yourself, as choosing the wrong type of product could be an irreversible mistake.

Financial information

'Pension wise' guidance will require the relevant information. The guidance session will have to be based on your financial information.

Apart from estimating what your living expenses are likely to be, you'll need to know full details of your pension arrangements, what other pensions you have and any other income (for example if you're still working). This can be difficult to pull together and you'll need information from your pension provider.

Unfortunately, pension statements are often baffling. There is no requirement for pension firms to issue standardised pension statements, giving you the necessary vital details about your pensions in plain English.

This may stop you making best use of your guidance session. Apparently, the pensions industry is working on this, but action is long overdue.

The free guidance session will only take you so far. At the end of the guidance session you will receive a written record of what was discussed and possible options, but you will have to make your own decision and find the best solution for yourself. If you still aren't sure, you might need to pay for expert individual financial advice.

The guidance should explain any hidden costs of products you might buy. It is important to know the costs of buying products, even if you are doing it yourself.

For example, buying an annuity for a £30,000 pension fund direct from your pension company could cost you around £500. Your pension company takes 'commission' even if you receive no help. Other products will also have fees and charges, so make sure you understand them. This money may be better spent paying for an independent financial adviser to advise what's best for you.

Will 'Pension wise' protect customers?

I'm concerned that some people won't take-up the guidance or may not understand it - this is all so new. Therefore, I believe customers need extra protection against buying unsuitable products.

The Financial Conduct Authority should impose an explicit duty of care on providers to ensure they ask you some vital questions and explain risks and charges of their products simply and clearly before you buy anything.

They should ask about your health, whether you need to provide for a partner and whether this is your only pension. This second line of defence is really vital to help customers make the most of the new pension freedoms.

The brave new world of pensions is truly exciting and offers tremendous potential to improve outcomes for millions of people, but of course there are risks that it could all go wrong if you don't understand pensions and companies don't treat their customers fairly.

You can find out more about Dr Ros Altmann and her archive of articles at pensionsandsavings.com. You can follow her on Twitter via @rosaltmann.

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