The biggest pension reform in a century gets underway in April 2015, when over-55s will be able to withdraw multiple lump sums from their pension pot to spend, save or invest, as they wish.
On the face of it, getting rid of the need to buy annuities and giving cash-savvy over-55s the opportunity to spend and nurture their own pensions, looks like a great idea.
But given the size of many pension pots, the proposed freedom and flexibility could come at a price as it may open the floodgates to a string of high-value frauds, ID thefts, tax avoidance and a quick route to money laundering.
The appeal of pensions has always hinged on rewarding long-term savers by offering generous tax relief on their contributions. Instead, savers’ earnings are locked up until they are 55, before allowing them to take it a bit at a time from their nest egg for the rest of their lives.
Without the substantial tax relief on offer, why else would anyone ring-fence their hard-earned cash in a pot that only gives a return later in life and at a relative trickle?
From April, pensions will start being treated like current accounts for the over-55s. They will be able to make withdrawals, spend it as they wish, or simply re-invest it elsewhere. There is even talk of some pension providers offering ATM cards so withdrawals from pension pots can be done from a handy hole-in-the-wall.
Big pension pots offer very rich pickings for fraudsters. If they suddenly become relatively, or more easily accessible, will over-55s suddenly become the default ID victims of choice for fraudsters?
This in turn heaps further responsibility on providers to ensure they always know who their customers are and that they are certain they are dealing with them. With such sizeable numbers at stake, failure to maintain a suitable level of due-diligence will quickly see the under-performers fall foul of the regulators.
Sizeable losses will almost certainly be reflected by sizeable fines. The new pension regulations may also fall foul of bogus fund managers, or money launderers posing as legitimate pension investors, who may simply hide behind the new scheme as a front to move sizeable lump sums around and get ill-gotten funds layered into the financial system.