Looking out for pension pitfalls
WHILE few will argue against the concept of putting people in charge of their own money, pensioners who come unstuck may rue the day Chancellor George Osborne scrapped the obligation to buy an annuity…
Pension reforms are a great opportunity to take charge of your lifetime savings but the wrong decision could ruin your final years.
David Smith, financial planning director at Tilney Bestinvest, says you must do your research carefully and warns against falling for the growing number of pension freedom “myths”. “Some people believe they will be able to use their pension as a cash machine, but the fact that you have to pay tax on withdrawals rather scuppers this.”
And there is unlikely to come a time when you can literally withdraw money from your pension from a cashpoint, he says.
Smith says it is too soon to hail the death of the annuity. “If long-term interest rates rise at some point in the future and interest rates follow, annuities could even return to their former glory days.”
Insurance companies will soon be launching new pension and annuity schemes to fit in with the new legislation, so it may be worth waiting to see what products come on to the market before committing yourself.
If you to take your pension as cash then spend all the money, don’t assume you can fall back on means-tested State benefits.
The Department for Work and Pensions (DWP) has made it clear that if you do that, you may not be able to claim support such as pension credit.
Neil Lovatt, director at Scottish Friendly, says there are dangers lurking behind Government rhetoric on pension freedom. “If you spend, gift or lose all of your pension, you will only be allowed to claim extra State help if the DWP agrees with the financial decisions you have made.”
Lovatt says it is unclear what happens to any pensioners that the DWP deems to have been reckless. “Without State benefits how will they support themselves?”
Andy Cumming, head of wealth management at Close Brothers Asset Management, says many people will need independent financial advice to cope with the complexities of pension freedom.
“People wanting to dip into their pot without taking the right advice and guidance is akin to giving the keys to a Lamborghini to a learner driver.”
Yet only around one in four over-50s plan to seek retirement funding advice, according to research from retirement specialist LV.
The good news is that there is free support out there. Contact government-backed guidance service Pension Wise at Pensionwise.gov.uk to learn more about your choices or to arrange a conversation with a pension guidance specialist.
The Pensions Advisory Service, run by volunteers, can also give you help and support at Pensionsadvisoryservice.org.uk or on 0300 123 1047.
If you want independent financial advice but don't have an adviser, you can find several in your local area by visiting no-obligation website Unbiased.co.uk.
