The Financial Conduct Authority (FCA) is pushing through extra safeguards to protect those planning to take advantage of the new pension freedom rules.
From April, those with a defined contribution (DC) pension will be given new flexibility to cash in their whole pot, rather than being forced to buy an annuity at retirement.
To support the overhaul the government set up a free guidance service, recently branded Pension wise, to help those about to retire understand the new retirement income landscape. However, it’s not compulsory.
As a result, the FCA wants there to be a ‘second line of defence’ for those about to retire, to ensure they’ve made an informed choice.
The new rules come as research suggests that many pensioners may not actually be able to take advantage of the new pension freedoms anyway.
In a letter to CEOs, Christopher Woolard, FCA director of strategy and competition, has set out guidelines on what pension providers must do when a customer contacts them to access their pension pot from April.
[SPOTLIGHT]The watchdog wants firms to ask pension savers about key aspects of their circumstances that relate to what they have decided to do with their pension savings. These will include issues related to health and lifestyle choices.
Pension providers will have to give a relevant risk warning to their customers, like the tax implications of their choice, in response to the answers they receive.
Firms must also go further and highlight that the Government’s free guidance service Pension wise, or regulated advice, is a key part of making such an important - and in some cases, irreversible - decision.
The FCA is fast-tracking the additional rules to come into force on a temporary basis from 6th April 2015.
Barriers to pension freedom
Pension freedoms are undoubtedly the most newsworthy aspect of last year's Budget.
However, new research suggest that many people may not be able to take advantage when they come into force.
Xafinity Group, one of the UK’s largest pension consultancies, looked at over 80 pension schemes looking after the pensions of over 250,000 UK employees.
It found over half (58%) of occupational pension schemes are undecided about whether they will enable members to use the new freedoms, while 15% say they will not offer the new flexibility.
The new pension freedom rules apply to anyone with a DC pension, but it’s up to each pension scheme to decide whether they will allow their members to take advantage.
Paul Darlow, head of proposition development at Xafinity, said: “Offering additional flexibility brings extra costs to pension schemes as well as additional risk and operational implications. While many pension schemes have an aspiration to provide some flexibilities in the future, most will be unable to do so by April.”
Those approaching retirement therefore face uncertainty, with the choice of delaying retirement, retiring within the existing scheme and missing out on the new flexibilities, or moving benefits into a new pension scheme which could attract significant costs and charges.
Mr Darlow says those approaching retirement should contact their pension schemes to understand their options.