The pension system is changing next month and the new move – known as pension freedoms – will give people some great opportunities: but also present some problems.
It affects all those aged 55 or over who now have the chance to take their pension pot and do what they want with the cash. But with that freedom comes danger, warns pension expert Jamie Jenkins of Standard Life.
“People are no longer tied into buying an annuity, an income for life,” he explains. “One of the new options is to be able to take all the cash out of your retirement pot and that may not be a good idea for everyone.
“Why? People who are still earning will discover that the money taken out of their pension pot will be treated as income and taxed as income. And that’s taxed at their marginal rate which, depending on their circumstances, could be 40 per cent.”
In other words there are major tax implications for freeing your retirement savings. Although you are allowed to take up to 25 per cent tax-free, much of the rest could be grabbed by the tax authorities without careful planning.
But there’s a much more alarming risk, Mr Jenkins continues. “The biggest risk is scammers,” he warns. “The worst thing that could happen to anyone under the new freedoms is that they take all their money out and hand it to someone who is scamming them.”
The rogues have already started up and many offer what may look like appealing and even genuine investment opportunities.
“They can seem very appealing,” Mr Jenkins warns. “There’ll be persuasive sales people with glossy brochures, guaranteeing returns of something like 10 to20 per cent in risky ventures such as foreign investments or holiday homes, but the risk is that you’ll lose all your money.”
How can you spot the scammers? They usually cold call prospective victims, Mr Jenkins points out. If you get an unexpected call offering help with unlocking your pension or “the opportunity of a lifetime”, put the phone down!
For more advice and Jamie Jenkin’s view of how annuities will become more flexible in the future, watch the video of our interview with him.
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