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Scam warning as thousands of pension savers fail to seek financial advice

Joanna Faith
Written By:
Joanna Faith
Posted:
Updated:
05/10/2016

Hundreds of thousands of pension savers are being left to fend for themselves when it comes to retirement decisions and risk falling victim to scams as a result, according to the TUC.

It analysed figures from the first year of pension freedoms and found none of the 300,000 savers in defined contribution schemes who withdrew cash lump sums sought financial advice first.

Another 60,000 bought annuities without consulting a financial adviser. And a further 11,000 purchased ‘drawdown’ contracts, which allow them to take money from their pensions, without seeking advice.

Pension freedoms were introduced in April 2015 and mean savers in defined contribution schemes no longer need to buy an annuity, which guarantees a lifetime income, when they reach retirement. Instead they have unfettered access to their pension pot.

By failing to get advice, retirees have to make a range of complicated decisions about their likely lifespans, investment plans and choosing between complex, often expensive, pension products, the TUC said.

TUC General Secretary Frances O’Grady said: “Pension freedom may sound great on paper. But it is not liberating to leave hundreds of thousands of people to fend for themselves in what is now a very complicated and expensive part of the pensions market.

“The inevitable result, if nothing changes, is a rise in scams and more older people suffering hardship.”

The TUC is calling for the government-backed National Employment Savings Trust (NEST) to be given the power to offer retirement income products. It said savers need to have access to “robust, low-cost” products but commercial providers “have been slow to offer these to customers”.

The Department for Work and Pensions is currently consulting on this idea.

How to find an adviser:

We suggest using online services such as Unbiased.co.uk or vouchedfor.co.uk. These sites allow users to search for an adviser by specialism, location and cost.

When you’ve compiled your short list of potential advisers, ask each candidate the following questions:

  • 1. Are you an independent financial adviser?

This might seem obvious, but the legitimacy of an IFA should be your first consideration. For an IFA to qualify for the title, at the very least they need to hold a Financial Conduct Authority (FCA) -recognised financial planning diploma, and a valid Statement of Professional Standing (SPS)

  • 2. What are you best at?

Most financial advisers can advise on a number of topics, but whether you specifically require general support across financial affairs, or seek expertise in one or two areas, it is important to identify an IFA’s core strengths.

  • 3. What’s your philosophy in respect of…?

Every financial adviser will have their own views, beliefs, and personality. It’s important to understand an IFA’s philosophy – their strategy, selection process, risk appetite, and more – to see whether their characteristics match with your own.

  • 4. How are you paid?

Since 31 December 2012, all advisers must charge an upfront fee they agree with you in advance. However, how they charge these fees varies significantly.

Most common is a percentage fee, proportional to the money managed. First, you will pay an initial percentage for becoming a client, then an ongoing percentage for each year the IFA manages your money. The percentage can vary significantly (it could be as low as 0.5 per cent, or as high as 5 per cent), so ask for clarification.  Other financial advisers bill by the hour, a payment structure associated with the legal sector.