Trustees urged to help members understand retirement risks

Trustees urged to help members understand retirement risks

Pension scheme members approaching retirement are not prepared for the potential risks of accessing their retirement pot, according to trustees.

Research by Wealth at Work and the Pensions Management Institute (PMI) found 88 per cent of trustees fear their members nearing retirement will face heightened attention from scammers they are not prepared for.

A further 81 per cent said they didn’t believe members were equipped to deal with the tax implications of accessing their pension. 

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Trustees also expressed concern that their members’ money will not last for the duration of their retirement, as well as the risks facing members that opt to transfer out of their defined benefit scheme. 

In spite of these fears, just one third of trustees provide financial education for their members, while 61 per cent admitted that their schemes "do not provide or facilitate one-to-one financial guidance" for at-retirement members. 

According to figures published by the regulator last August victims lost an average of £91,000 each to scammers in 2017

Jonathan Watts-Lay, director at Wealth at Work, said: "A lifetime’s savings can be lost in a moment with highly plausible fraudsters persuading members to move their retirement savings into unregulated high-risk or bogus investments that could result in them losing their entire pension. 

"The amounts lost to pension scams can be significant with the FCA revealing that victims of pension fraud had lost £91,000 on average each, with some even losing more than £1m to fraudsters."

Mr Watts-Lay added: "Trustees also have taxation fears for their member’s at-retirement. They are right to be concerned about this as there are a number of ‘tax traps’ that pension scheme members need to be aware of when accessing their retirement savings - all of which can have a material impact on income levels."

Tax traps include moving into a higher income tax rate when cashing in DC pension pots, triggering the Money Purchase Annual Allowance, or failing to make use of tax breaks when passing on a pension inheritance.

Since the 2015 pension freedom reforms savers have been granted unfettered access to their pension pots from age 55 but only 25 per cent of the pension capital is tax free, the rest incurs income tax.

The freedoms were not afforded to defined benefit pensions, which has prompted a surge in transfers out of such schemes.

Mr Watts-Lay said: "These risks also equally affect defined benefit members who are considering transferring their pension.

"Assessing whether it is right to transfer is highly complex with multiple risks to consider around how to manage the money once transferred, including market volatility, inflation and taxation issues and running out of money too soon.

"The decision once taken is irrevocable."

Patrick Connolly, chartered financial planner at Chase de Vere, said: "These are justified concerns. Pension freedoms can provide some fantastic financial planning opportunities, but they also bring added complexity and a greater risk that people will make the wrong choices.