Advisers’ need to grasp the launch of pension freedoms means there are new risks.
The ability to take funds however and whenever you want means clients will potentially take their money with the risk of running out of funds later in life.
Risks that advisers and their clients need to be aware of include:
• investment risk – if a retirement product is linked to the stock market or interest rates, then people may receive less than they bargained for;
• fixed-term returns – while fixed term products allow people to change their mind, they may well find that when their current product comes to an end, they are unable to get the same rates they have previously;
• starting too early – increasingly people are working later but when they are told they can start taking their ‘pension’, they don’t query this. Delaying taking the state pension or taking out an annuity can mean they receive a higher monthly income when they need it;
• unexpected change in circumstances – over a 30-year retirement people can have a change in circumstances which may mean that a decision taken, especially for fixed or guaranteed benefits, may prove to be inappropriate in retrospect;
• tax ignorance – choosing to take retirement income in a specific form can have an impact on the level of tax a person needs to pay, especially if someone chooses to take their entire pension pot as cash;
• not reading the small print – while people who have an adviser will have someone to guide them through the process, they still need to read the small print and understand their rights/obligations;
• longevity risk – people who choose to manage their own income (via for example drawdown) may find that they ‘outlive’ their savings as they have miscalculated their longevity;
• over/under withdrawal – making choices around retirement income means that some people may spend all their income before they die while others may die with significant unused assets; and
• inflation – while people do have the option to choose inflation-linked products, these are more expensive so many don’t.
Therefore, a comfortable fixed income at the start of a retirement might have far less purchasing power in late old age due to inflation.
There is also the risk of not receiving advice. The launch of Pension Wise means people have access to guidance but this is not tailored to their individual needs and leads to information and not a recommendation of the kind delivered through regulated financial advice.
