Contractors seeking to use the pension reforms introduced in April 2015 to access cash from their pension pot could threaten their retirement income unless they seek professional pensions advice from a financial adviser first.
This is according to Contractor Wealth’s pension expert Angela James, who believes that some contractors could face financial ruin later in retirement if they don’t get the right advice now: “Withdrawing cash from a pension at 55 may not be in the best interests of a contractor’s long-term future retirement plans.
“Contractors are required to seek guidance before taking advantage of the pension reforms, but this is not the same as taking advice. Without advice, contractors withdrawing pension funds could find they don’t have sufficient savings and jeopardise their retirement.”
Many contractors are finding their pension scheme providers less than flexible when requesting cash draw downs. Some pension funds are charging fees and others are refusing outright to implement the reforms introduced in April 2015, which are not mandatory for scheme providers, but contractors can switch schemes to get around any barriers.
Seeking guidance on pensions is not the same as advice
According to James, pension regulations require that individuals seek guidance before taking advantage of the pension reforms, but not advice: “None of the actions allowed in the pension reforms, such as transferring cash out of the fund, require any paid advice.
“Contractors need to seek guidance, but this is not the same as advice. Guidance is just pointing out some basic facts. Advice is a specific course of action designed for an individual by a qualified professional based on specific circumstances, with full recourse.”
So, if a contractor took guidance and then drew all their money out of their pension and ten years down the line had no money, that’s the individual’s fault. However, as James explains when advice is taken a contractor’s options are different.
“If a contractor took advice and an adviser recommended a course of action and it transpired that this was not the best course of action, then the contractor may have cause for complaint. As a result, they have access to the Financial Ombudsman and its compensation scheme.”
What happens when a contractor seeks financial advice
James highlights that the first step an adviser takes is to find out how much savings a contractor has, how much retirement income they will need and over how long a period. Then the adviser designs a plan around those needs.
“The contractor’s best option might be a staged draw down of savings, buying an annuity or other alternatives, such as a short term annuity to support a phased retirement when a contractor may still be working part-time so does not require their full retirement income.”
The key point, according to James, is that these are plans and decisions that contractors should not tackle alone: “With life expectancy growing annually, some contractors could be looking at retirement lasting thirty or forty years. They need to be sure that they have planned for this future.
“However, no adviser is going to recommend that a contractor withdraws their pension funds unless the alternative is hugely compelling.”
Contractor options if a pension provider refuses to release cash
Contractors who want to take cash from their pension pot but whose providers are proving to be less than helpful do have other options, as James explains: “It is possible to change scheme provider and move pension savings from one fund to another.
“This is a process that financial advisers may recommend for other reasons, so there are well established processes. There are quite a few considerations in a pension transfer and professional assistance is essential, as an adviser takes responsibility for the move.
The costs to the contractor can include their adviser’s fees, a break in investment growth while the fund is moved and some of the scheme’s features may change, as well as the scheme’s costs. But if this means a higher performing fund or access to other features, then the additional costs may be justified.
James concludes: “The pension reforms introduced in April 2015 deliver an unprecedented level of flexibility for contractors, but they also offer an unprecedented level of risk. This is why taking advice is vital to protect future retirement income.”