Business

New pension freedoms could 'create mis-selling scandal'

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New plans by the Treasury to give savers more freedom over their pension pots have been sharply criticised by an industry expert.

It follows the government's announcement of new rules on tax-free withdrawals from pension funds.

"The chancellor appears to be creating the perfect environment for a mis-selling scandal," said Tom McPhail of Hargreaves Lansdown.

However, the Treasury has insisted that thousands of pensioners will benefit.

From April 2015, savers will be able to dip into their pension savings when they want.

Each time they do, 25% of what they take out will be tax-free.

Under current rules, a 25% withdrawal must be taken as a single lump sum on retirement to be free of tax.

Chancellor George Osborne said: "People who have worked hard and saved all their lives should be free to choose what they do with their money, and that freedom is central to our long-term economic plan."

'System failure'

Pensions expert Tom McPhail said he supported the new freedom that savers will have.

But he warned that those who withdraw money from a pension pot and then invest it could end up with very poor returns.

"Many professionals struggle to get it right, so the idea that at least some inexperienced investors won't get it wrong is recklessly naïve."

He is particularly worried for those who invest without getting the help of a financial adviser.

Such advisers are regulated by the Financial Conduct Authority (FCA).

However, there is much less protection for people who make their own decisions to invest.

"Without regulatory oversight, when investors do run out of money - and some will - there'll be no accountability for this system failure," he said.

However the Treasury insisted that the reforms would be beneficial for millions of retirees.

"From next year they'll be able to access as much or as little of their defined contribution pension as they want and pass on their hard-earned pensions to their families tax free," said chancellor George Osborne.

"For some people an annuity will be the right choice whereas others might want to take their whole tax-free lump sum and convert the rest to drawdown.

"We've extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum," Mr Osborne said.

'Popular' move

Pensions expert Dr Ros Altmann said the government's changes have the potential to help millions of pension savers make better use of their pension funds.

"Being free to access their money freely as they need to, rather than being forced to buy particular products, will be very popular, however people need to know that their pension provider will allow them to take advantage of the new freedoms," she said.

The government announced earlier this year that about 320,000 people would get the freedom to access pension pots flexibly without being hit with punitive tax rates.

Individuals will also be able to pass on their unused defined contribution funds to a nominated beneficiary when they die, rather than paying the 55% tax charge which currently applies.

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