Industry professionals have called for a pension withdrawal cooling off period. This follows the growing mis-selling scandal that saw £400m in compensation claims last year.
We take a look at how this cooling off period could make pension freedoms safer.
Reforms in 2015 allowed consumers more freedoms over their pension pots. From the age of 55, people can now choose to withdraw a lump sum from their pension before they retire.
The huge income offers more financial flexibility than ever before. While this may seem like a great option, the majority of people do not have the knowhow to make investment decisions with a sizeable pension pot. They will likely seek advice from an adviser.
This can lead them into the hands of untrustworthy advisers. They may be offered poor advice and put their money into options that are unsuitable for them, including a self-invested personal pension (Sipp).
Only the first 25 per cent of the pension pot is tax-free. Any withdrawal over the 25 per cent can result in the consumer overpaying emergency tax. It also impacts the saver’s ability to save a pension in the future. This includes receiving contributions from an employer.
Being hit with these huge fees and the flexibility of the funds may cause concern to an inexperienced saver. Seeing their pension withdrawal dwindle from the fees may cause them to act too swiftly when making a decision on how to get the most out of their pension pot. This is alongside the vast amount of investment options.
When British Steel Pension Scheme (BSPS) members were forced to withdraw their pension pots from their company scheme, many were mis-sold Sipps. This has left a large number of the former steelworkers out of pocket, with no option but to take action against their advisers for offering unsuitable advice.
The same can happen to anyone with no investment experience and a reasonable pension pot.
Cooling off period
A thirty day cooling off period would allow consumers time to reflect on their decision.
There would be two ways the cooling off period could work. The first would be a 30 day hold on funds being released to allow time for reflection. The second option would be for the individual to pay the funds back into their scheme if they change their mind. These options will allow them to avoid any financial implications they had not anticipated. It would also offer a safety net for those who have been given a hard sell by an unscrupulous adviser.
If this comes to late for you and you’ve taken a pension withdrawal and invested in a Sipp following poor advice, get in touch today. Our team of experts can advise you on the next steps to take to secure compensation.