Industry watchdogs have ordered pension providers to give better advice about retirement choices following the new pension freedom reforms.
In a bid to avoid pension savers making costly errors regarding their retirement income, the Financial Conduct Authority (FCA) has introduced tougher new regulations that pension firms must adhere to.
Because many pension savers approaching retirement (or over the age of 55) may be confused about their options once the new pension freedoms come into effect next month, the FCA wants companies to be more vigilant in the advice they give to their members to help them make the right financial decisions .
Many financial experts have long been critical of the way pension providers act, and welcome the fact that it will be more difficult for pension savers to get it wrong when it comes to buying an annuity.
Previously, pension savers would often accept the first offer their provider gave them, not realising they didn’t have to buy their annuity from their pension provider.
In addition, many people are eligible for an enhance annuity, which because of either ill health or poor lifestyle choices such as heavy drinking and smoking, would mean a better value annuity.
In some cases savers were offered annuities that didn’t take into account their partners, leaving them with nothing if they died first.
Under the new regulations set out by the FCA, pension providers must now ask its members about the state of their health and if they have any bad habits that might impact upon their health, whether they have a spouse dependent on their annuity product, and ensure they understand any tax implications that may arise if they choose to use their defined contribution pension fund as a bank account to withdraw large sums of cash instead of buying an annuity.
The pension companies will also be tasked to ensure that their members understand any potential impact on their retirement income if their means-tested benefits change.
The FCA also wants companies to warn its customers about potential scams, how the fraudulent companies operated and how their money will not be protected if they choice to invest in schemes that operate outside of the UK.
The FCA is concerned that many over-55s will fall foul to scammers who will offer ‘too good to be true’ investment returns, but fail to mention the tax implications of withdrawing large sums of money from their pension fund. Often these schemes will also have a high administration cost. Schemes such as this will not be protected by current UK financial laws so investors run the real risk of losing all of their retirement income.
The Government will also be offering its own independent guidance service through the Pension Advisory Service and Citizen’s Advice. However, this will be a general overview of the freedom reforms, and will not be tailored to a person’s own financial situation.