Protect pensioners from scammers who want their savings, say MPs

Pensioners are at risk of being ripped off when new rules on cashing in pension pots are introduced next month, MPs have warned.

Changes to accessing retirement savings come into force on 6 April and the public needs better protection from the accompanying threat of scams, mis-selling and poor decision-making, said the work and pensions select committee. Pensioners could withdraw £6bn within the first four months of the new regime, which abolishes the requirement to convert a pension pot into an annuity – the product that provides an income for life – and leaves people free to do whatever they like with their retirement cash.

In a report published on Tuesday, the parliamentary committee also criticised the city regulator for declaring that it was impossible to “stop fools behaving like fools” when it comes to spending pensions nest eggs. They accused the Financial Conduct Authority of being too slow in the past to take action to tackle previous pension scandals, and said they were not convinced it was “sufficiently focused” on the job.

The chair of the committee, Dame Anne Begg, said: “Savers need to be properly protected from being ripped off in frauds or scams, or suffering financial loss from making the wrong decision about how to use their pension pots. The pensions industry has not always done enough in the past to help savers make the right decisions.”

She added that pension saversneeded a single “strong” regulator to act in their interests. Currently, the job is shared between the FCA and the Pensions Regulator.

Seizing on a comment made to the committee by Christopher Woolard, a director of the FCA, that “what we can never do... is stop fools behaving like fools,” Begg said that this “does not inspire confidence in the FCA’s willingness to be proactive in protecting savers”.

There is concern that scammers are planning a fraud bonanza as they use talk of “pension freedom” to con the unwary. From next month, more than 300,000 individuals a year with defined contribution or money purchase pensions will be able to access them as they wish after the age of 55.

There are fears that the industry will not be able to cope with demand and that insufficient advice systems are in place. Concern has already been expressed that some people will decide to blow their retirement savings on a fast car or luxury holiday, and many commentators have warned about the risks of older people falling victim to scams.

The Pensions Advisory Service (TPAS) – an independent, government-backed organisation – has reported that calls to its helplines indicated scams had already increased since the changes were announced in last year’s budget. Insurer Standard Life also told a committee hearing last year that an “active fraternity” of criminals saw an opportunity in the reforms.

In the report, the MPs said that while they welcomed the concept of greater flexibility at retirement, “there are also significant risks for individuals from the new freedoms”. These included running out of cash and “exposure to fraudulent, mis-sold or detrimental financial products”.

Britain’s insurers spent years clearing up the mess caused by the bad pensions advice they gave to at least two million people during the late 1980s and early 1990s. Workers including nurses and teachers were wrongly advised by commission-hungry sales staff to opt out of company pension schemes and take out less advantageous personal plans.

The MPs said they recognised the government had launched a service called Pension Wise that would provide guidance to people approaching retirement. The committee also noted that the FCA had announced new rules which meant pension providers would be required to question older people about their personal circumstances – including their health and lifestyle – and issue them with “risk warnings” before releasing their cash.

The MPs recommended that the new government that takes office after the May election – in conjunction with a new independent pension commission they were proposing – should assess whether the protections for savers put in place so far were adequate. “If weaknesses and loopholes are identified, urgent action needs to be taken as early in the new parliament as possible.”

Responding to the report, an FCA spokesman said: “The pension freedoms offer consumers real opportunities about the decisions they make with their pension pot, but we are absolutely committed to ensuring they are protected from the risks the committee rightly identifies whilst giving consumers the right information to make these important decisions with confidence.”

TUC general secretary Frances O’Grady said: “The committee is right to warn that savers are at risk of being ‘ripped off’ in a new pensions scandal after George Osborne rushed through radical reforms with little thought of the consequences... We cannot afford to let savers get stung by excessive charges.”