27th January 2015 by John Lappin
What does it matter what people do with their own pensions savings and investments when it comes to taking an income? It matters quite a lot actually for a host of reasons including their own financial well-being of course.
In our determination to fire nanny, or at least end the nanny state when it comes to pensions, we certainly risk allowing some rather unsavory elements get their hands on retirees’ money.
At Mindful Money, we have picked just two reports from several dozen in recent weeks which show the pension and investment industry is very worried too.
First we see that the number of pension scams has risen threefold according to insurer Phoenix Life. They surveyed more than 2000 people so it is clearly more than just PR puff – the sort that asks about seventeen people.
For the moment, the scammers appear to be concentrating their fire on ‘liberating pensions’ costing those who do so a small fortune in fees and a bigger fortune in terms of the next tax bill. Liberation – before 55, and before and after April is simply not allowed.
Post April, we believe that not only will liberators have a field day, but some of them will mutate into offering investments – usually overseas – which promise very impressive levels of income. More on that in bit. First our second alarming release.
BlackRock suggests that come April, 17% of the baby boomers will withdraw all of their pension and invest it elsewhere. The global fund manager says that 9% of the total – or just over half of this 17% will invest to generate an income – and 8% will put it into a cash savings account.
Now there are a host of reasons to advise those putting the money in cash not to do so, if they don’t want to call on it for a few years or more. Certainly, given the new freedoms, it may not make sense to pull it out of the pension wrapper all in one go risking pushing yourself into a higher income tax bracket.
And yet, arguably it is the 9% we should worry about more. What sort of asset will they find to generate an income?
You can, of course, leave it invested within a pension and construct a strategy to pay an income but, hopefully, maintain most of your capital. That is the essence of income drawdown, though it obviously has its pitfalls and needs to balance the income you take, and aimed for return and the investment risk. There are also some big challenges about keeping taking income out of an investment pot in falling markets. But fundamentally, you are unlikely to face what we might call the total wipe out of your money.
Other retirees or near retirees may withdraw all of the money, and buy a little flat and rent it out. There are risks here, and you could end up considerably less well off, in a property market crash or if the surveyor messes up. But this choice should almost always leave an asset, which can in extremis – barring the building falling into the sea – be sold again.
Probably the biggest risk is that this some of these 9% may take their cash and then buy into a risky property investment, perhaps overseas, offering a ‘too good to be true’ rate of interest/income.
Generally, if a financial adviser has suggested you invest in such as scheme, and it proves inappropriate then you can seek redress. Indeed, any adviser shouldn’t be advising on this sort of scheme except for very sophisticated investors.
But if a significant proportion of people ‘freeing’ their pension find their own way to such schemes, then they could lose all their cash. This route from pension to bank account to overseas investment scheme has very little protection.
Sadly, we have witnessed several such schemes collapse or as near as makes no difference in the past few years – they can involve very esoteric assets for example reforestation linked to carbon credits, but many involve property developed often on islands in places such as the Caribbean or Cape Verde. Not all have lost all the money, some have failed to pay income and merely seen precipitous falls in value, with the money locked up in legal and regulatory disputes and wrangling.
At Mindful Money we are convinced these schemes will see a big boost after April. Not all will be outright fraudulent though many will. Some will just be very risky and will promise far too much by way of returns and income. They may even tread carefully up to the line where a scam begins and not cross a legal line. But most if not all will be utterly unsuitable for people who want an income in retirement.
But we wonder if we can get the message out there to people who may be about to make that mistake. Maybe savvy Mindful Money readers need to spread that message too.