In a survey of 800 customers Royal London said it found that while 16% of clients said they would use the money to clear other debts such as a mortgage, only 32% intended to reinvest the funds in an alternative savings or investment vehicle. A further 25% said they would simply put their money into a bank, building society or cash ISA account.
This meant that not only would most of their clients likely have incurred an income tax charge on their savings, many would be earning less with the funds than the original pensions schemes provided.
As a result the insurer said the Financial Conduct Authority (FCA) should consider doing more to help a wider number of people understand the potential benefits of continuing to keep cash in a pension and to better understand the consequences of cashing in pension pots.
“Having extra focus in the Retirement Risk Warnings framework would help to ensure that customers appreciate all the options they have within their existing pension. This is particularly important for those customers who are not willing or able to access financial advice,” said Fiona Tait, pension specialist at Royal London.
The FCA has already run a ScamSmart campaign and has a website which advises retirees to reject cold-calls, check its warning lists, and seek impartial advice.
Royal London’s research showed the average size of pension pot being accessed was £15,500, which is in line with figures released by the ABI last month. The average size of the fund being fully encashed was slightly lower at £14,100. Based on these figures the likely initial tax charge would be £3,347.
The lack of sophistication shown by many of those accessing their retirement savings under the pension reforms, which allowed savers over 55 virtually unlimited access to their funds, has also triggered a surge of investment fraud based in London’s financial centre.
The Financial Times reported on Thursday that the scale of the problem had sparked alarm across the City and authorities had begun a campaign of disruption against suspected criminals who were renting exclusive offices in prestigious locations.
The paper said criminals were making high-pressure cold calls urging people to place large sums in too-good-to-be true schemes involving wine, gems, antiques, art, overseas property, oil wells, forestry, carbon credits and other exotic commodities.
It said they buy lists of individuals who may be receiving lump sums from their pensions, or who are vulnerable because of dementia or other illness.
Dozens of people have been arrested as police made unannounced office visits, and at least 14 suspected criminal groups disrupted, the police told the paper.
The UK consumer service charity Citizens Advice warned earlier this month that a growing number of over 55s are being targeted by increasingly complicated pension scams, many of which were investment-based cons.