Leading Pensions Lawyer Says Changes Rejuvenated The Market But States Risks Are Highest With Most Vulnerable Losing Out
The House of Commons’ Work & Pensions Committee has this week launched an inquiry to understand the impact of new pension freedoms introduced five years ago.
The inquiry will be conducted in three parts with the Committee initially looking at pension scams and what more can be done to prevent them.
Pension freedoms were introduced within the last few years, intended to give people over 55 more choice to do with their pension as they wish.
The Committee is particularly interested in finding out how common pension scams are, what happens to people who are victims of scams, and what more public bodies could do to tackle scams.
Expert Opinion“The flexibilities introduced by the 2015 pension freedoms for DC pension savings has rejuvenated the world of pensions, both for people with modest pension savings and for the better off.
“The 2015 flexibilities have made pensions a key way of wealthier families to pass some of their family wealth tax efficiently around the family to their loved ones and down the generations. It is something of a tax planner’s dream and this is why the flexibilities sometimes turn into a pension nightmare. It tends to be, somewhat ironically, the better off pension savers who do get tricked out of their pension savings by scammers – looking for too good a return or too sophisticated a pension product, promising impossibly high returns.
“The 2015 flexibilities do compare favourably with the earlier position of DC pension savers. Before 2015, DC pension savers who were only able to use a limited form of pension drawdown or buy an annuity after taking their 25% tax free cash. This ended up with the insurance industry holding all the cards and monopolising the market, resulting in poor annuity terms for consumers. That market has now been broken which is a good thing for consumers. There is a real advantage now in some people with defined benefit pension savings transferring them over to DC pension schemes so they can access the more flexible DC pension savings regime.
“However with full DC pension flexibility also comes full risk. This is not just investment risk and mortality risk but also the risk of being scammed. There is the potential for losing all your pension savings and ending up with a tax bill because of entering into pension transactions that are not authorised by HMRC. As scammers become more and more sophisticated it is difficult to work out if an individual, and what they are recommending for your pension savings, is legitimate or a potential scammer with a scam. This is why cold calling for pension matters has been banned.
“However the internet remains something of the wild west – it’s very difficult to regulate and the emphasis is on the pension industry to take more action to prevent pension savers from being scammed. The reality remains however that pension savers should also do their own due diligence if they’re looking at moving their pension savings out of a known and respected pension provider at the suggestion or recommendation of a third party. They should keep with known and reputable IFAs and pension providers and remember the old adage, if something looks too good to be true, it probably is too good to be true. With pensions, it’s often the people with the most to lose who do lose their pension savings.”
Penny Cogher - Partner
The deadline for sending views is 9 September 2020 and more details about the inquiry can be found here.