Over-55s making the most of new pension freedoms are on the “cusp on a mis-buying crisis” as savers invest in risky drawdown products without the help of an adviser.
The warning was issued by LV=, a leading UK pension provider, as it called for government-backed pension guidance to be made mandatory for savers using the new option to spend their retirement pots as they wish.
Philip Brown, head of policy of LV=, said the 2015 reforms, which removed the near-requirement for pension savers with defined contribution funds to buy an annuity, had opened up the financial options for over-55s.
But since the changes, sales of risky pension drawdown had risen dramatically, with very few buyers first seeking the help of a professional adviser, he said.
The number of savers taking up the offer of a free 45-minute guidance session on their retirement income options from Pension Wise, the government-backed service, has been low.
“We are on the cusp of a mis-buying crisis,” said Mr Brown, who was speaking at an event on pension policy at the Labour party conference in Liverpool. “One of the biggest challenges now is people buying products without understanding the full risks.”
Mr Brown said that savers with modest-sized pension funds were moving into income drawdown, a product that until a few years ago was only considered suitable for those with larger funds.
“Drawdown was always a high-end product. We were dealing with people with £150,000 to £250,000. Now you are dealing with much smaller funds making use of the drawdown mechanism.”
Risks in drawdown include managing investments, running out of money or not spending it fast enough to provide a comfortable retirement, he said.
“There is a greater risk now of mis-buying, or people buying unsuitable products because they don’t have the help of an adviser.”
He added that it should be mandatory for savers using the pension freedoms first to have a Pension Wise guidance session, a move that could lead to increased take-up of professional advice.
Speaking at the same event, Steve McCabe, Labour MP and a member of the work and pensions select committee, said he supported the idea that savers should be required to take guidance sessions.
Since the pension freedoms came in, the government has lowered the age at which savers can access Pension Wise guidance from 55 to 50.
During the 45-minute free session, which can be conducted face-to-face or over the phone, pension options are explained, as well as the tax consequences of each. Pension Wise staff also discuss which options might be suitable and provide tips on what to do next.
Sessions are open to those with defined contribution pension pots, not defined benefit, or final salary schemes. Appointments can be booked at pensionwise.gov.uk/appointments
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