Five risks of the UK pension reforms
The way you access your retirement in Britain is changing in May, with Chancellor George Osborne set to allow people to choose when and how they. In our last post, we looked around the world to see how pensions vary, and to what extent different pension schemes are successful. In this blog post, we put the risks that the new pension plans raise under the microscope.
1. Giving pension liberations a new lease of life
The Pension Administration Standards Association suggested back in June 2014 that the new pension freedoms could facilitate a new crop of pension liberation cases resulting from ‘overstretched’ administration resources.
As a result of the reforms being enacted on a tight timeline, the focus of administrators will be on processing cases, and this may enable pension liberation schemes to slip by under the watchful eye of the administrators.
2. Protecting Direct Benefit savings
The government has already mandated advice on pension transfers where the direct benefit (DB) amount and benefits is greater than £30,000.
However, in July 2014, the FCA discovered that a third of pension transfer DB advice was unsuitable between 2008-2012. This included providing enhanced transfer values, where ready cash was used to ‘seduce’ pension users. The FCA is worried that greater freedoms will make this seductive ability easier.
3. Watching the pension pot run dry
Many believe that one of the best things about the newfound pension freedoms is the ability to draw out what the pension holders want, when they want.
However, the freedoms may backfire as investors might be left with empty pension pots. Pensions minister Steve Webb might be relaxed about the idea of people draining their pensions to get the holiday homes they’ve always wanted, but it might turn out that this essential benefit of the reforms is its downfall.
4. Flooding the pension system
Many have complained that there simply hasn’t been enough time between the announcement of the Budget last year, and the reforms being implemented.
As an example, the Royal London Chief Phil Loney has suggested that the timing of the Budget pension reforms (November 2014) doesn’t give providers enough time: ‘We should see what comes out in April both in terms of guidance and products as only the start.’
5. A nail in the coffin for annuities
Another major risk is that savers might be too conservative with their retirement fund as a result of the negative connotations of annuities. If people purchased annuities, they would avoid this situation, but George Osborne has announced that ‘’no-one would need to buy an annuity’ following the reforms, making them appear less attractive to savers. Are we beginning to see the start of an annuities spiral?
Unfortunately, we can’t predict the future, but we would advise that over the next 12 months, if you’re looking to invest, withdraw, or do anything else to your pension, you seek the advice of one of our expert financial planners.