Consumer bodies are warning that retirees taking their pension as a cash lump sum from April may be unaware of the financial compensation protections they are losing.
Radical reforms announced in the Budget mean consumers can access their pension with restrictions from age 55.
But experts say they are concerned that consumers are unaware of the different protections that apply under the Financial Services Compensation Scheme.
The FSCS protects “long-term insurance” products, which includes annuities and personal pensions, up to 90 per cent of the fund. For deposits, however, it only protects up to £85,000 per person and per company.
In a blog post on the FSCS website last week, FSCS chief executive Mark Neale said the organisation plans to target awareness communications at those taking advantage of the pension reforms.
He says: “We shall need to explain the scope of FSCS protection to people who, from next April, want to take advantage of the liberalisation of retirement saving announced in the Budget.”
FCA Consumer Panel chair Sue Lewis says: “We are concerned that consumers with pension pots exceeding the FSCS’s £85,000 limit may inadvertently lose out on protection for their money if they choose to withdraw their pot rather than buying an annuity or leaving their money invested.
“For those with larger pots, the panel has frequently drawn attention to the fact that the deposit guarantee is not operated on a ‘per-brand’ basis. The FSCS will need to stress to consumers who take the cash that they should not deposit more than the limit with any one institution, as multiple brands can be part of the same firm.”
However, Lewis stresses that the median pension pot in the UK is only around £18,000.
Which? executive director Richard Lloyd says: “All parties involved in giving guidance and advice at the point of retirement must ensure consumers are fully aware of how their money is protected within different products.”
LV= head of retirement proposition Phil Brown says: “There is a risk that people will move their money into the financial product they understand best – cash in a bank account – without realising the financial compensation protections they are losing.”
How FSCS protections vary
Deposits: Limit of £85,000 per person per firm
Investments: Limit of £50,000 per person per firm
Long-term insurance (includes pensions, annuities and life assurance): 90 per cent of fund protected, with no upper limit.
Sipps: If one of the underlying products fails, the compensation limit depends on the type of product. Claims arising because the Sipp manager or provider becomes insolvent fall under the investment limit of £50,000.