It doesn't pay to go it alone
IT'S the new tax year, and the flexibilities that allow us to draw down cash from our pension savings are three years old this week.
It's the perfect time to look at how things have changed.
But first, let's take a look at things that have not changed.
There are several constants in the pensions industry that the last decades have proved time and time again.
For example, many reports have indicated that pension incomes for women lag far behind men. Royal London told us lately that on average, a man has £85 per week more than a woman, and it's getting worse – 10 years ago, the so-called ‘pensions gender gap' was ‘just' £31.
Another constant is summed up by the old saying “no problem is so big or complicated that it can't be run away from".
This sums up ‘pensions inertia', where people tend to put off setting up a personal pension, or joining a workplace pension, and thus lose out on vital years of contributions. The government's answer to this was auto-enrolment, where eligible workers are put into a pension, but are free to opt out again if it doesn't suit them. In other words, inertia has been turned around, and harnessed to our financial advantage. Now, those who do nothing remain in their pension, and the scheme is designed to ensure that 80 per cent of workers will be pension saving in the future.
But the behavioural trend that concerns us today is perhaps the most dangerous of all: the tendency not to take advice, when making important pension decisions.
We know that, along with arranging our mortgage, sorting out our pension is the most critical financial decision of our lives.
However, figures from the Financial Conduct Authority (FCA) show that we are under the impression that we know enough to make complex financial decisions on our own.
Let's look at those who drew out cash from their pension in the latest recording period, which was 2017. Among people who opted for a full withdrawal of their pension funds, under a third (32 per cent) took advice, down from two in five (41 per cent) the year before.
Of those, three out of five said they didn't need advice because they knew what they were doing. This is remarkable, considering that it's nearly a full-time job for financial advisers to keep up to date with new developments, and the complexities of the pensions drawdown market.
It's not rocket science: quite apart from tax considerations, if you take out too much of your money and blow it now, you'll have less left for later on. Some experts are predicting that the consequences of non-advised drawdown could be the next ‘pensions timebomb' that will, in future, come back to haunt us.
This is before we even consider how many people out there are exposed to the dangers of being lured into dodgy investments by the rising number of individuals interested in their pensions cash.
I collect these stories. Here are just a few recent ones, from both sides of the Atlantic, to show it's not an exclusively local problem.
In January, the Pensions Regulator investigated a UK-based wealth management scheme where it is believed savers were cold-called and subjected to high-pressure sales techniques. Many of those who signed up requested that their savings be placed in low-risk UK-based investments - but later found their money had been placed in high-risk, unregulated overseas investments instead.
In the US, it was reported that an 81-year-old former waitress from Glendale, California lost her life savings when she was duped into handing over thousands of dollars to a fake investment scheme, with the promise of a likely $2m return plus a new Mercedes. It later emerged that her money had been transferred to a bank account in Nigeria.
Back on this side of the pond, another 81-year-old woman from Greater London was contacted by conmen claiming to be the police, who talked her into handing over money by persuading her she was helping with an undercover operation. They even had her draw the money in instalments from various banks. She lost £136,500 of her savings.
So this week's bottom line is painfully clear. Between non-advised drawdown decisions, and the proliferation of pensions and investment scams, going it alone without a professional financial adviser is a rocky road, fraught with many hidden dangers.
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005 . Further information is available on the Facebook page 'Kennedy Independent Financial Advice Ltd'.