Failing to seek advice can have disastrous consequences
Since the introduction of pensions freedom in April 2015, the door has been opened for many clients to decide what they do with their pension funds in retirement. This has given all pensioners the flexibility not only to access their benefits, but to receive them in a very tax-efficient manner.
Unfortunately, the freedoms also mean many people are now exposed to the danger of making rash financial decisions, while many also risk falling foul of expensive scams and tax bills.
If you are looking to make the most of your pension but have concerns about how best to utilise your funds, you could benefit from taking financial advice.
Taking an entire pension as one big lump sum creates two things for a client:
1) The ability to go to a cash machine and actually see that the money is in their bank account, which I believe acts as a comfort mechanism for a lot of people.
2) An increased likelihood of gaining a potentially unnecessary tax bill.
Most people pay a level of basic rate tax throughout their working lives, and some will never pay a higher rate. By taking an entire pension as a lump sum, many will find that they become a higher or additional tax rate payer for the first time in their life; such a scenario would see a pensioner pay more tax to the government at a time when they should be paying less and thinking about retirement plans.
The introduction of these freedoms means that financial planning has become even more of a priority for thousands. Most people will receive the new single-tier pension, but it is unlikely this alone will be enough for most people in retirement. Because of this, people will need to make the very most of their savings.
The importance of advice
Taking financial advice in retirement is essential, not only to manage income and tax, but to ensure pensions (and other savings) are invested in a manner that matches the individual’s attitude towards risk.
In retirement you need the comfort and assurance that you have maximised your income by making the best use of the many options that are now available - a regulated financial adviser can provide both, as well as protection provided by the Financial Service Compensation Scheme and the Financial Ombudsman Service.
A refusal to seek regulated advice is of course not a crime, but it should be noted that taking the wrong advice can be very costly.
I was once contacted by a client who wanted to access his police pension. He was 51 and still an active officer, but was unable to access his pension through his scheme. However, he had responded to a website that told him he could access all of his pension by transferring it to their overseas pension.
He completed the paperwork and was given the details of a bank account, to which he subsequently transferred his pension. Glossy brochures and a confident voice over the phone gave him the impression that the company was regulated, but, unfortunately for him, it was not the case. He has now lost his pension in the mire that is an unregulated pension investment.
To this day we are pushing his case in an attempt to see him reimbursed, but it is a very difficult situation because the ‘company’ does not have any HMRC registration, nor does it have FCA approval. What makes the situation worse is that once the Pensions Regulator ceases an unregulated scheme, it becomes even trickier to retrieve any of the money as they generally block any transactions in and out of the accounts.
Furthermore, if he had received any of his pension, he would be liable for an unauthorised pension charge of up to 40% of the value he received.
A regulated adviser should always offer the option of a face-to-face meeting with a client. Also, they should always explain and go through an initial disclosure document and talk about their FCA registration details. If this does not happen, then the client’s alarm bells should be ringing immediately.