NEW data from Citizens Advice has indicated that the vast majority of retired or close-to-retiring people are paying no attention to risk warnings relating to the new pensions freedoms which became available to them last year.
In its report ‘Drawing a Pension’, published in June, Citizens Advice surveyed 500 over-55s who had already accessed their pension pots, and found that just 1.6 per cent of them had made any changes to their plans, after receiving the alerts on risks from their pension company.
It was pretty clear that most had decided what they wanted, before even getting to the guidance or advice stage – and nothing was going to change their mind.
As most of us know by now, the new freedoms allow you, as the saver, to access some or all of your pension savings and draw them down, either in a series of separate sums or even as a lump sum and, once any tax due has been paid, to spend or reinvest the money as you wish.
However, someone contemplating drawing down a large amount from their pension might, for instance, receive a warning about the potential tax liability they would incur, as only the first 25 per cent of their savings can be taken tax-free, and the remainder is taxable.
This means that if you had a pension fund of £100,000 and you decided to take it all at once, you would be warned that the first £25,000 would be your tax-free lump sum, but the other £75,000 would be taxable.
You could then consult a financial adviser who could point out that, if it suited you, it might be better to consider taking £10,000 a year over 10 years. This would come out each year as £2,500 tax-free and then, if you had no other income, your personal allowance would cover the £7,500, and you would have no tax to pay.
The financial regulator The Financial Conduct Authority (FCA) concluded last year that this kind of pensions advice is far too important to be left to pensions companies alone. As a result, it ordered the pension companies to issue ‘personalised’ warnings tailored to each individual’s personal circumstances, in several ways.
First, the companies have to assess what course of action is being planned, by “asking a series of questions and actively engaging with the customer”. This will prevent, for example, the customer simply being referred to a website or ‘fobbed off’ with a brochure.
The FCA said this would help people who had been planning to ‘go it alone’, rather than talk to an adviser. The FCA statement said: “One of the key purposes is to encourage people who have chosen not to seek regulated advice, to consider their options carefully before making an irreversible decision.”
The personalised warnings the customer receives should, says the FCA, also take some crucial factors about their personal circumstances into consideration, including their state of health, and tax implications, and customers should also be given the ‘heads-up’ on the most common investment scams.
The FCA has highlighted the crucial fact: the risks inherent in their plan of action may not be obvious to them.
One commentator pointed out that when you’ve spent 40 years saving, and are facing a possible 40 years of retirement, it’s worth spending 40 minutes with a financial adviser, to make sure you’re getting it right.
Let me mention again the key statistic quoted earlier: that just 1.6 per cent of people who had already taken money from their pension changed their plans on what they were going to do with it, when they received advice after that point.
However, Citizens Advice also said that of those people who sought advice before they drew money down, 20 per cent changed their plans when they were shown a better way to proceed.
In other words, they found that advice from an independent financial adviser was of great use to them in helping to avoid the pitfalls and risks inherent in their plans.
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005
