Financial mis-selling scandals can generally be spotted in advance. Not by everyone perhaps, but there are insiders, people in the industry who can see it happening, as it happens. I speak from 40 years’ experience working in financial services, most of it in pensions. 

Non-advised (also known as execution only) pension drawdown — a way of taking income from your pension pot while leaving it invested — has all the hallmarks of the next mis-selling problem, which will emerge over the next few years.

The problems started in 2015 when the government introduced pension freedoms. This hugely popular rule change allowed those who had built up a retirement pot of money to have largely unrestricted access to the funds, including cashing it all in at once. The message was, and still is, “it’s your money, we trust you to spend it as you see fit”. In principle this is a good philosophy. There are problems though, with how it plays out.

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Firstly, this is harder than it looks. The challenge of how to manage a finite investment pot through retirement, maximising your standard of living but without running out of money, is the financial equivalent of repeatedly trying to thread a needle while riding a rollercoaster. The uncertainties of investment returns, inflation and life expectancy make it almost impossible to succeed.

Everyone’s situation in retirement is unique. You may own a home, have a guaranteed final salary pension, or have a small defined contribution pension pot; you may be married and your partner may or may not have a generous pension and you, or they, may not be in good health. So it’s not just about the pot of money you have in your retirement plan. It’s about how that pot of money fits into your wider circumstances.

Secondly, ever since the 2015 rule change, the Financial Conduct Authority, the City regulator, has been playing catch-up in its response to pension freedoms. Since 2023 it has imposed a regulatory regime called consumer duty, which requires firms to deliver good outcomes for customers, avoid foreseeable harms and support and enable their customers to pursue their financial objectives.

This presents the pension companies with a problem. If they are to demonstrate compliance with consumer duty, they need all the prompts, controls, financial-modelling tools, alerts and mitigations necessary to ensure their customers know what they’re doing. This has to be managed continuously. It also applies retrospectively, so even if you opted for drawdown (rather than using your pot to buy an annuity that provides a guaranteed income) without taking advice before consumer duty was introduced, the firm now has to comply with it in how it looks after you.

In practice, this doesn’t mean that you have to pay for advice but it does mean that firms need to actively help you to manage your savings, pre-empting any rash decisions you might make and guiding you through retirement. The good companies are at least trying to do this, but it is a work in progress.

I think it is inevitable that over the next 20 years some people are going to unexpectedly run out of money — particularly those who chose drawdown in the early years after 2015. This could be because of how they invested their pot or because of how much they were taking out of it. I’m willing to bet that the ambulance-chasing lawyers are looking on with interest.

Tom McPhail is a financial services expert specialising in pensions and retirement policy