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Until 2015, if you had been saving into a defined contribution pension scheme then when you wanted to retire you would buy an annuity, which is a financial product sold by insurance companies. Annuities pay a fixed amount for the rest of your life, your old age pension, which you would receive on top of your state pension. Annuities had a few different options, or benefits, such as being linked to inflation or having the guarantee of a payout even if you die early. I managed a team who sold them, working for a comparison firm which allowed retirees to shop around for the best deal. It was (and still is) vitally important for people retiring to declare any medical conditions because doing so could potentially increase the amount they got. This is because something like a medical history of cancer or a heart attack would, on average, mean you were less likely to live as long as someone who was healthier, so would receive more but over a shorter predicted period.
What happened with pension freedoms
In 2015 the government, in their infinite wisdom, changed the rules and allowed people to take out all their pension pot once they were 55. Pensions minister Steve Webb famously said that people were at liberty to buy a Lamborghini with their hard-earned savings, something that seemed silly and flippant at the time, in my opinion. Much as annuities seemed like poor value, with low interest rates meaning that returns were poor, it was at least an income for life. If you took your money out, whether it was to buy an Italian sports car or put it into another investment, you were gambling with your old age nest egg.
The new rules also meant that people in final salary schemes could transfer out of them and into an investment-based pension, something which is not usually advisable. Suddenly it was possible to gamble the benefits you’d accrued in a lifelong career and dodgy advisers were making a fortune in commission as a result.
Retirement options
These days (and even before the pension freedoms) there are alternatives to the traditional annuity. Income Drawdown is a product which is a pension contract and allows the flexibility of receiving an income whilst keeping some of your money invested still. This has tax benefits as well as giving you options, and if the stock markets do well then your retirement income could increase over time. However, as many adverts say in the small print, investments may go down as well as up, and in a bad market you could lose all your money.
Miss-selling of pension products
Sadly, the pensions market has become rife with firms looking to make a fast buck out of unsuspecting retirees. Investment products are complicated, and a reputable financial adviser will guide you through the maze. However, if they are not authorised by the FCA (Financial Conduct Authority) then you could find yourself handing over tens or hundreds of thousands of pounds to a dodgy offshore investment fund and never see it again.
Defined benefit miss-selling
As well as shady firms who take defined contribution pension pots and invest them in dodgy deals, there are others who persuade people with defined benefit (or final salary) schemes and persuade them to switch to another type of pension. Defined benefit pensions are usually the best type of scheme, giving the pensioner a percentage of their final (or average) salary, something which would cost many hundreds of thousands of pounds for the defined contribution equivalent. Therefore, only in a very small percentage of cases would it be better for the customer to switch, but the high commission payments to shady advisors means that they could make tens of thousands of pounds by persuading customers to switch.
What to do if you’ve been a victim of pensions miss-selling
If you’re not happy with the advice you received, or you were persuaded to transfer out of a defined benefit scheme, or you’ve lost your pension savings to a risky or unregulated alternative then there are specialist firms who will pursue a claim for you. Once such firm is Money & Me, who specialise in people miss-sold as a result of the pension freedoms.
You can also contact the Financial Ombudsman Service for any financial wrongdoing, to resolve complaints and disputes with firms.
How to avoid pensions miss-selling
The government has a service called Pension Wise which gives guidance to people over 50 to understand what their retirement options are. They are signposted to shop around and there are tips for choosing a financial advisor.
The main thing to do when approaching retirement is not rush into anything. Find a reputable adviser and shop around – don’t accept what your existing insurer is offering because they are usually the worst deals around.