The Wild West….
You might be thinking how could we ever include the Wild West and pensions in the same sentence? Well changes made to UK law in 2016 have meant there’s been a wave of unsavoury characters taking advantage of people either shortly before or at the point of retirement. Often referred to as ‘Pensions Scams’ the Pensions Penguin prefers to think of these ‘Scams’ as daylight robbery – just without the Smith & Wesson being held to your head.
The background – in 2016 George Osborne introduced legislation which would become known as ‘freedom and choice’
At the point of retirement people who were in money purchase pension schemes (i.e arrangements where an employer and employee paid in a fixed amount during their working life) would no longer have to purchase an annuity from an insurance provider. They could instead choose to invest their pension pot in a self invested pension arrangement.
Why was this done? Well annuities are pretty expensive. Insurers have to guarantee that they’ll be able to pay you a set amount for the rest of your days. First and foremost, they just don’t know how long you’ll live and they don’t want to overpromise to later run out of money. As such they have to be prudent.
In a similar vein, due to being prudent (and highly regulated) they also have to hold predominantly lower risk investments. With lower risk investments they are expected to earn stable (albeit modest) investment returns.
Last but not least, regulation might require them to increase their reserves (the rainy day fund they have in place in the event everyone lives longer than they thought or the investments they hold underperform). Since you buy your annuity at the point of retirement (and pay for it in full there and then) the insurer isn’t able to ask you for extra money at a later date should things play out differently to what they expected. They have to allow for this and also factor in that regulation may change in future, hence they calculate the amount of reserves required today and also what might be required in future.
The freedoms and choice legislation did just that. It gave people freedom and flexibility. People can now invest their pension in a self invested pension and this means they can continue to invest in riskier asset classes – including stocks and shares – when they are in retirement. they can also decide how much to pay themselves in any given year (also referred to as the level of ‘drawdown’).
However, there was an unintended consequence of this legislation. There were shady individuals offering to ‘liberate your pension’. These people didn’t live by the same moral standards as you and I. Depriving someone of a large majority of their pension (either before, at or during retirement) didn’t concern them. they just wanted to make a quick buck.
These scammers managed to straddle both technically legal but morally questionable practises and in the extreme approaches which were flat out unlawful. In almost all cases no morally sound advisor would be able to stand behind or recommend what they were doing. There are examples of pension pots halving or even disappearing altogether. the only people being ‘liberated’ were the scammers getting rich off the ‘commission’ they were taking.
For many of us, at the point of retirement our pension pot is likely to be either our biggest or second biggest asset (after our home). Whilst we might not feel the need to take proper financial advice it is absolutely essential.
Most of us wouldn’t unscrew our gas boiler from the wall or try to change the radiator in our car. We leave those jobs to a professional. When it comes to moving your pension pot or formulating your retirement plan you are likely making one of the most important financial decisions of your life! it is absolutely imperative to use the expertise of a qualified professional
Make no mistakes, addressing the ‘scamming’ issue has been extremely high on the government’s agenda. Understandably they want all of us to retire happy and where you’ve earned a pension through your hard work they want you to get what you’re due!
If you’re planning on retiring in a few years and aren’t sure who to speak to a natural starting point is www.Pensionswise.gov.uk. This is a government service and if you’re over 50 and meet the criteria (most of you will) they’ll happily arrange a free 45–60 minute appointment (either in person or over the phone) to help you understand your circumstances and discuss your options with to you.
Photo credit: Pexels
