Watchdog warns on dangers of pension drawdown policies

The Financial Services Authority updated its hit list of potential scams and mis-selling scandals yesterday, adding products such as pensions, health insurance and traded endowment policies to its catalogue of possible dangers for 2006.

In what is becoming an increasingly lengthy part of the watchdog's website, the regulator revealed it was particularly concerned about the use of so-called "income drawdown" policies, which allow people to withdraw money from their pension while keeping the remainder of the pot invested.

Following an inspection of nine of the most active financial advisers in the drawdown market last year, the FSA said it found "far too many examples of bad practice" - all of which were now being followed up with the individual firms. As a result, it said it would be launching a consumer education campaign over the coming weeks, outlining the complexities and dangers of using drawdown products - especially for those with small pension pots.

The regulator also expressed concerns about a new breed of geared investment funds, which invest in second-hand endowment policies. The rapid rise in popularity of the wrap account - which allow financial advisers to manage the underlying assets of their clients' portfolios online - was highlighted as another potential danger. Although the accounts have long been popular in the US and Australia, it is a phenomenon which is only just catching on in the UK - and one which the FSA conceded it does not yet know enough about.

The latest update adds to a watch-list which already includes Venture Capital Trusts, Payment Protection Insurance and Equity Release.

Earlier this week, Which?, the consumer group, became the latest organisation to criticise equity release products - which allow you to release money from the value of your home in old age. Which? focused on the high costs of such schemes, and argued that much of the advertising is irresponsible.

When the FSA looked at equity release last year, it discovered that more than 70 per cent of financial advisers did not gather enough information about their clients before signing them up to an equity release product. A second mystery shopping exercise is scheduled for the spring.