Only three in 10 Brits understand pension reforms
Over two thirds of people (71%) have little or no understanding of the government's forthcoming pension reforms, according to a new survey.
The study found that, with the overwhelming majority of Britons confused by the new rules, they are increasingly at risk of being scammed by criminals promising to 'unlock' their pensions.
Over one in ten people (13%) told accountant HW Fisher & Company they know nothing about the planned changes to pensions rules, while 58% said they only know "the basics".
But 77% of people surveyed by the firm admitted they don't know the difference between pension freedom and pension liberation.
Pension freedom relates to the reforms (due to be introduced in April 2015) announced by government that will give people aged 55 or over the flexibility to spend their pension savings how they wish. Whereas pension liberation is when people unlock their pension pots early - and often pay serious tax penalties as a result. Criminals have long been operating in this area.
A little bit of knowledge
David Breger, partner at HW Fisher & Company, said: "Having just a little bit of knowledge can be a dangerous thing. Most people have heard of the new pension freedoms and are keen to use them - but have only the haziest understanding of what they will entail.
"Anyone who receives a cold call offering them a fantastic-sounding opportunity for their pension should be extremely wary. Reputable investment companies seldom call out of the blue, and never engage in the high-pressure sales techniques employed by the unregulated cowboys. And if its sounds too good to be true…"
In mid-October, Moneywise found in a poll that, while savers are attracted to the flexibility and choices that are offered by the relaxation of pensions rules, they do not fully understand their options.
When asked what they want to do with their pensions savings a significant 34% said they had absolutely no idea, 28% said they would take the cash, 15% said they would go into income drawdown. Only 6% said they wanted to buy annuity.
"The pension reforms will eventually offer millions of us the chance to take charge of our retirement planning - but with freedom comes responsibility, and people should think very carefully before making decisions which could impact their retirement income forever," Breger added.
Find out everything you need to know about the new pension rules and how to plan ahead for the retirement you deserve with our new magazine, How to Retire in Style. The magazine is available to buy now from all leading newsagents, or can be ordered online at moneywise.co.uk/retire
An alternative to an annuity, income drawdown (also known as an unsecured pension) allows you to take income from your pension fund while the fund remains invested and so continues to benefit from any fund growth. The drawdown of income has to be calculated carefully as taking too much income could exhaust the pension fund so experts say the annual drawdown must not exceed what the assets would normally yield in an average year. The invested pension fund could also be hit by market turbulence and the value of the assets could fall.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.