Low interest rates drive retirees towards riskier investments: What should you do to reduce the hazards?
- Rock bottom rates have influenced older people’s financial decisions
- Some may invest in products not covered by compensation scheme
- What steps should you take to ensure protection? Find out below
- Do you need help fixing your finances? Find a financial adviser service
One in five retirees have explored putting savings in financial products they would not normally consider to get a higher rate of return, new research reveals.
Pension freedoms have encouraged retirees to invest their pots to provide an income in old age, but a study by the UK’s financial compensation scheme shows some are taking risks that could leave them out of pocket.
The UK’s prolonged low interest savings environment has had a direct impact on older people’s financial decisions, tempting them to look at high interest investment products, says the Financial Services Compensation Scheme.
Retirement finances: Low interest rates are driving retirees towards riskier investments, warns financial compensation scheme
Some could unknowingly be investing money in investment products beyond the FSCS’s compensation limit, and this could be lost if the provider went out of business, warns the finance industry-backed organisation.
The FSCS will pay compensation if a firm authorised by the Financial Conduct Authority fails and is unable to pay back money it owes customers, up to certain limits. These vary between products, and are all listed here.
The organisation has launched a new ‘pension protection checker’ tool, which provides questions to ask firms about whether you will be covered by compensation, and if so by how much.
The FSCS survey found the low interest rate environment has prompted 10 per cent of retirees to cash in their pension to seek a better return than they would have got through an annuity.
These provide a guaranteed income until you die, but are expensive and restrictive, and generally shunned in favour of investing your pension nowadays.
Some 12 per cent of retirees had paid for advice from a financial adviser to see how they could make their money go further, the poll of 2,000 people aged 55-75 also found.
How do you ensure pension and investment products are covered by the FSCS?
The compensation scheme suggests doing the following:
1. If you’re considering a new investment, search the Financial Conduct Authority register to check that the provider is authorised.
2. Use our questions to ask any provider about your protection (see below).
3. Be wary of scams – visit the FCA’s ScamSmart page to find out more.
‘Clone fraud’, where scammers pass themselves off as well-known finance firms to steal cash from savers, has boomed during the pandemic.
Criminal gangs are using legit-looking clone sites to steal ‘big money’ from investors, according to a financial crime expert who explains how to protect yourself here.
Details of a firm, such as its real telephone number and website address, can be verified on the FCA register linked to above.
You should use these details to make contact with a firm to be sure you are dealing with the real one.
What questions should you ask pension and investment firms?
STEVE WEBB ANSWERS YOUR PENSION QUESTIONS
1. Is this investment product covered by FSCS?
2. How much of my money is protected?
3. What would happen to my money if something happened to your business
1. Does FSCS protect my pension?
2. How much of my pension pot is protected?
3. Is my defined benefits [final salary] pension protected by FSCS? [These are covered by a separate body, the Pension Protection Fund]
4. Am I still protected if I buy an annuity?
5. What if I buy other products with my pension pot?
6. What would happen to my pension if something happened to your business
7. If I transfer money across from an existing pension, will that also be protected?
Caroline Rainbird, chief executive of the FSCS, says: ‘We are seeing increasing numbers of customers seeking compensation from FSCS due to failed pension and investment products, or poor advice.
‘The real danger is that if consumers choose to put money into high interest pension and investment products that are not FSCS protected, they could lose life changing sums of money from their retirement pots if the product provider fails.
‘For peace of mind, consumers should always check that new or existing pensions and investments products are FSCS protected.
‘Our website, www.fscs.org.uk, offers guidance on how to check for FSCS protection, including our new Pension Protection Checker tool and investment protection explainer video.’
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