OpinionFeb 11 2015

Pensions clock ticking

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Pensions clock ticking
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It is ‘Countdown’ time – but, sadly this time, without the wit of Nick Hewer and radiance of Rachel Riley to keep us entertained.

It is 87 days until we go to the polls and vote for the candidate and party who we think will best represent us in the House of Commons and govern the country for the next five years.

Although I am fascinated by politics – my best subject by far at university – I must admit I am already bored by the endless point scoring and stream of (empty) promises being made by the main parties (Labour and Conservatives).

Irrespective of what is said between now and polling day, difficult political decisions will need to be taken post May 7, many of which will undoubtedly result in financial pain for households up and down the country. Deficits need to come down which means more cutbacks and more taxes.

As you all well know, it is also ‘countdown’ time in the financial arena. There are only 55 days to go before new pensions freedoms are granted to those aged 55 and over.

No longer will people necessarily be trapped into buying a poor value annuity with the pension fund they have amassed over their working lives. Instead, they will be able to take their pension as and when they please.

It is all very exciting – and empowering. I also know many financial advisers are excited about the new pension freedoms because of the opportunity it gives them to advise clients through the new rules. But let us not pretend that the new era is without its risks. Dangers await the ill-informed.

By way of example, I was emailed late last month by a data manager called M Dajenais (gender not disclosed) asking whether I would be interested in ‘200,000 UK pension release leads looking to buy lettings’.

There are only 55 days to go before new pensions freedoms are granted to those aged 55 and over

I was told the data was ‘fresh and less than 30 days old’ and that all leads ‘have opted in to hear about property investments’. If I wanted the leads, I was told, I should act fast because the data would only be resold ‘10 times’.

What a financial journalist would want with such data I have no idea. But I presume M Dajenais thought I was involved in the property lettings game (I am, in so much as I am a tenant in a flat owned by a money-conscious Italian landlord) and would be grateful of some new attractive sales leads – at a price of course.

No doubt, for some of the 200,000 pension leads identified by M Dajenais, releasing pension funds to buy investment property may well make financial sense. But releasing a big chunk of pension over and above the tax-free lump sum is not without big risks and potentially onerous tax charges.

I imagine we are going to see more of this as we get closer to April 6 – and rogues look to make money from the freer pensions regime, some illegally.

It is a worrying situation not helped by the fact that the government and the department for work and pensions will at some stage in late March be forbidden from spending any public money on explaining the new pension freedoms under General Election ‘purdah’ rules.

Pension liberators, looking to persuade people to access their funds before age 55, are already taking advantage of the confusion surrounding the new pensions regime. They are thriving despite the best efforts of insurers to thwart them - in the process taking colossal fees while leaving those whose pensions they pillage with hefty tax charges to pay and a much depleted fund.

We have even seen one company attempting to pass itself off as the government’s official pensions guidance service which was set up last month to provide information to the 320,000 people who every year are likely to take advantage of the new pension freedoms.

Last week, a copycat website – pensionwisechoices.co.uk – was taken down after concerns it was passing itself off as Pension Wise, the official government guidance site. Well done to the FT for alerting the Treasury to this copycat.

Tom McPhail, font of all pensions knowledge at Hargreaves Lansdown, has come up with a list of the top 10 risks associated with the new reforms. As well as fraudulent pension liberators, he warns of the official Pension Wise service not being able to cope with demand for its guidance. He is also concerned about pensioners depleting their pension pots too quickly and making withdrawals that could result in big and unexpected tax bills.

In light of such concerns it is not surprising that the FCA is looking to ensure that people who can take advantage of the new freedoms do not end up making wrong decisions.

It has asked pension providers to act as a second line of defence, ensuring that people wanting to withdraw funds are made aware of Pension Wise, the opportunity to take regulated advice, and the tax implications of their decisions.

Some such as Ros Altmann, the government’s business champion for older workers, are delighted that this backstop is being introduced. Others believe that the reforms are being pushed through far too quickly and that chaos will break out come 6 April.

We will get a clearer picture when the ‘Countdown’ music stops and the new tax year is upon us. Independent financial planners have a pivotal role to play in demonstrating that pension freedom is better than what prevails today.

Jeff Prestridge is personal finance editor of the Mail on Sunday