Simon Read: "Pension freedom is months away but if we don't act soon, the freedom may be to make an expensive mistake with our future"

 

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The introduction of the new pension freedoms has been "alarmingly chaotic", reckons Nigel Green, chief executive of the financial consultancy deVere Group, He said this week: "The implementation of changes appears to be being rushed in a cynical attempt to woo older voters ahead of May's election."

Others in the pensions industry have expressed similar concerns, with many warning of a potential scandal that could engulf hundreds of thousands of people each year if they make the wrong decision about their retirement savings.

But what could be the wrong decision? In short, the new freedoms give people aged 55 or over several choices. The first is to take all their money from their pension pot as a cash payment. Or they could buy an annuity, as many do under existing rules. Or they could keep money invested in their pension fund and draw an income from it.

The pensions expert Tom McPhail, at the adviser Hargreaves Lansdown, reckons most people will do a bit of all three. But he warned this week that anyone interested in taking money from their retirement savings in the days or weeks after the new freedoms come into force, on 6 April, should phone their pension company as soon as possible.

"Insurance companies and occupational pension schemes are struggling to get their systems organised in time to meet the likely demand from their customers," he told me. "In many cases they don't have the necessary computer systems, trained staff or regulatory procedures to enable them to do what their customers want."

Part of the problem is a lack of ability to change systems that may have been designed for the existing pension regime. "Many providers need to learn how to manage an income-drawdown arrangement, pay an income from invested funds, or explain tax liabilities and investment risks to customers," Mr McPhail pointed out.

The City watchdog added to the burden on pension firms this week by ordering them to ask consumers more questions – to help protect them from making a mistake when the changes come into force.

Companies will be required to ask about health and lifestyle choices or marital status, in particular with consumers who do not take up the Government's offer of the Pension Wise guidance service.

Pension firms will then have to give consumers risk warnings, such as the tax implications of whatever decision they make. For instance, anyone tempted to take all their pension cash in one go will pay tax on everything above 25 per cent. But delaying until they are in a lower tax bracket, for instance, could save thousands.

It is hoped the regulator's move will provide a "second line of defence" for consumers confused by the new freedoms, but fears remain that many will sleepwalk into a costly mistake come April.

With pension providers floundering with the new rules, people should act now, advised Mr McPhail. "With potentially several hundred thousand investors all looking to move their money around in the space of a few weeks, many pension providers are likely to be tied up dealing with all the administration.

"So if you are planning to act, you need to act sooner rather than later – especially if you have specific spending plans you want to use your pension cash for." That's wise advice, I'd say.

We'll be counting down to the new pension freedoms in the coming weeks and, as part of our coverage, the pensions minister Steve Webb has agreed to answer readers' questions.

If you would like to ask anything about the new freedoms, or how you might be affected by the upcoming state pension changes, please send your question for the minister to me at s.read@independent.co.uk. I'll pick the best to put to him and publish his responses in a future issue.

s.read@independent.co.uk

twitter: @simonnread

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