As of last Monday (6th April), pensioners are now able to make their own informed choice on what they do with their savings once they hit retirement, following the radical announcement in the Budget in 2014.
On top of this, the recent 2015 Budget revealed that as of April 2016, pension freedoms will be extended to around five million people who have already bought an annuity. This means that restrictions on buying and selling existing annuities will be removed, therefore letting more have freedom to use their capital as they wish.
“For most people, sticking with that annuity is the right thing to do. But there will be some who would welcome being able to draw on that money as they choose - the same freedom we are offering those approaching retirement in April this year,” George Osborne, Chancellor of the Exchequer said.
“People who’ve worked hard and saved hard all their lives should be trusted with their own pension,” he added.
However, these freedoms may be more hazardous than expected, as those who may lack in being financially savvy could be in danger of losing their savings in risky investments or scams.
“…This particular age group can be perceived as being more susceptible to fraudulent activity and may be perceived as vulnerable,” commented Ashley Ilsen of development lender Regentsmead.
Ashley said that it may not be healthy to suddenly into a big pot of cash in this way, adding “the temptation is to spend and get in a habit of spending. The pot could quickly run low.”
However, Ashley does believe that in his opinion, it is an improvement to the current situation as people will get more of a choice on when and how to spend their savings.
“With choice comes responsibility, and it is up to individuals to understand what income they need in retirement and take action to ensure they get it,” said Rhydian Lewis, Founder and CEO of P2P platform RateSetter.
“There is a big risk that people do nothing and find themselves unable to retire when they choose. We encourage retirees to explore all the options available to them including new investments like Peer-to-Peer which can deliver investment like returns without the same level of risk,” he added.
However, Louis Alexander, Managing Director of The Bridgecrowd, said: “No investment is risk free - but neither is a pension fund investment.”
Louis said that to assume that any pensioner of sound mind would squander their life savings is “highly unfair”.
He added: “On the contrary, they are more likely to be cautious and seek out safe investments rather than riskier ones due to the importance of the money at stake - they are not going to earn it again over the next 30 years like the younger (more risk averse generation).”
Not only can the freedoms change how pensioners spend their savings, it could also, in effect, diversify the alternative finance market.
Recently, P2P lender Lending Works launched four special features in time for the change this month, in order to make lending more lucrative and stress-free for ‘silver lenders’.
These enhancements include a one per cent cashback bonus, a dedicated account manager, auto income and a retirement income calculator, in order to help older lenders make the most of the new pension freedoms.
It is likely that more alternative financiers are set to launch new products in line with the changes, in order to make the most of the transition.
Scott Marshall, Lending Director of Roma Finance, noted that pension freedoms could be an interesting opportunity for the bridging finance market.
“There will always be people who are cautious with their retirement nest egg but on the other hand, there will be some pensioners who decide to use some or all of their pension pot to seek out property opportunities, especially with property yields outperforming basic savings rates; and they may have more time on their hands,” Scott explained.
“Refurbishing and renovating properties can be a very profitable but time-consuming activity and often only works well if you’re hands-on. It is therefore suited to an astute pensioner who has the time to commit and this could open up the market for bridging which would provide funds to complete projects or tackle larger projects that might otherwise not have been possible.”
Age caps on lending requirements may also see a shift due to the potential rise in lending over the age of 55.
Louis stated The Bridgecrowd does not have an age cap for borrowing or lending, adding: “Provided that there is realistic repayment plan, we will lend.”
More recently, in an aim to ensure pensioners are in a position to make an informed decision, the Financial Conduct Authority (FCA) and the government have been working together to introduce appropriate guidance and protection measures.
The FCA launched the next wave of its ‘ScamSmart’ campaign a few weeks ago, in preparation for the changes. This warned pensioners to be aware of scammers who could potentially target retirees with dodgy investment scams at high returns.
The watchdog advised investors to reject cold calls and get impartial advice, as well as to check the FCA Warning List.
To read more about ScamSmart, visit the website here.
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