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4 November 2015 last updated

Pension freedoms have increased scams, says Committee of MPs

The Work and Pensions Committee have said the the pension freedoms introduced in April 2015 are insufficient for people to make a well-informed choice and lack of regulatory clarity is leaving pension savers exposed to scams.

The pension freedoms introduced by the Chancellor George Osborne allow anyone aged over 55 to take their 25% tax free lump sum and the remainder as cash taxable at their marginal rate.

The tax changes to pensions allow the fund to be transferred to beneficiaries on early death and under the age of 75 paid completely tax free.

People with defined benefit schemes can also transfer to defined contribution schemes such as flexi-access drawdown to have benefit from the same pension freedoms.

The government also offer people retiring access to free guidance from the Pension Wise service and MPs have said the take-up of this service has been lower than expected and they would like to see more accessible guidance for people when retiring.

Pension freedoms increasing scams
  Committee of MPs is concerned the new pension freedoms increase the risk of financial scams
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Increased risk of scams

The Work and Pensions Committee are concerned that people have been placed at risk of being exploited by financial scammers to take advantage of the opportunity that people can now access their full fund as cash, less tax at their marginal rate.

After the new pension freedoms were introduced in April 2015, during April and May 65,000 people had taken £1 billion of funds as cash with an average amount of £15,500.

Over the months April, May and June 204,000 people accessed their funds, twice the number in the same period in 2013 probably due to the a backlog waiting to see the new rules. Annuity sales have reduced considerably over this time from 90,000 in the second quarter 2013 to only 12,000 for the same period this year.

Some 121,000 people have accessed their fund by cash withdrawal and 71,000 by either flex-access drawdown and fixed term annuity.

The committee see the lack of suitable advice as a danger for people approaching retirement. Frank Field, Chair of the Committee, is concerned over the lack of information about the reform and if the Pension Wise service is working.

Pension Wise is a web, phone-based and face-to-face service provided by Citizen Advice and has provided 20,000 guidance appointments since the service started.

Pension freedom reforms have been operating for six months and if this is enough time for the scammers to set up schemes going to defraud people of their savings it should be long enough for the Government to publish data to show if the guidance and advice is working.

In particular the Committee criticised the Pension Wise website as being static and not offering opportunities for personalisation. The take-up for the service has been lower than expected and the Committee have said that it should have at least an online income calculator.

The report has said that the freedom to choose was not enough and people must also have the freedom to make an informed choice.

News related stories:
New pension rules see £1 billion of funds removed at retirement
Flexi-access drawdown will be used by 130,000 people says HMRC
Radical changes to pension annuities in Chancellor's Budget
Related internet links:
Parliament - Pension freedoms not enough without support
BBC - pension reforms open door to scams
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