New rules could bring raft of toxic pensions, warns consumer body

9th September 2014

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The pensions market could be flooded by “toxic” products when new freedom on how retirees draw an income comes into force next April, the Financial Services Consumer Panel (FSCP) has warned.

The panel, which acts as an advocate for consumers within the regulator, fears there could be a boom in the use of self-invested personal pensions (Sipps) and other flexible products by people who are not wealthy or financially savvy enough to be able to manage them responsibly.

In an interview with FT Adviser.com, Sue Lewis, the chairwoman of the FSCP, says: “The immediate risk is that all sorts of products will come on the market that are just quite toxic, or are not very good for consumers because drawdown on the whole isn’t very good for people who don’t have a lot of money.”

Lewis says that the FSCP published a paper last November of changes needed to the annuities market, but got “a bit more than we bargained for” in the reforms announced by the Chancellor in this year’s Budget.

The Government unveiled plans to allow retirees to withdraw their pensions however they wish from next April, so that they will no longer be pushed into purchasing an annuity to guarantee an income for life.

Lewis says that while it is good that pensioners now have more choice “there is also a lot of risk”.

She says that more people will be saving into a pension because of auto-enrolment, but they will not be prepared for the complicated decisions that they will have to make at age 55 or 60.

The Consumer Panel’s main concerns are that there will be a wave of Sipps and drawdown products where there is little transparency over high costs and where the underlying investments are high risk, which could be particularly dangerous for savers with small pension pots.

Lewis says the City watchdog, the Financial Conduct Authority, needs to keep a close eye on the sector to make sure that consumers are protected.

John Moret, principal of MoretoSipps, a consultancy, believes the Sipp market will double in size to £300 billion by 2017.

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