Switches, scams, holiday plans? UK pension industry braces for 'Freedom Day'

* Retirees to spend pension pot as they choose from April 6

* Concern of advice gap, that some may opt to blow cash

* Firms jockey for position, insurers set to lose more business

By Carolyn Cohn

EDINBURGH, March 13 (Reuters) - Weeks before Britons get free rein over how to spend their pension pots, industry players say it is unclear how many will choose to leave the safe harbour of an income-bearing annuity.

Some retirees are expected to ditch plans to buy those previously obligatory annuities in favour of more flexible pensions, while others could pay off debts or even splash out on treats such as a luxury cruise, in a huge shake-up for the sector.

The shock industry reforms, announced a year ago, mean from April 6, more than six million pension-holders will no longer need to buy a fixed-rate annuity with "defined contribution" pension savings. Such savings total around 300 billion pounds ($445 billion) in Britain.

The likely losers are firms whose life insurance business has traditionally relied on selling annuities, and the likely winners those insurers and fund managers who are able to both manage pension fund assets and provide more flexible products.

Speakers (Milan: BEC.MI - news) and delegates at a National Association of Pension Funds (NAPF) conference this week said that "Pension Freedom Day", as it has become known, could herald months of confusion.

"It has the potential to be a complete mess," said Andrew Scott, principal in the Edinburgh office of consultants Punter Southall.

Financial Conduct Authority Chief Executive Martin Wheatley told the conference the industry was moving into "the great unknown", with the risk of an M25 motorway or Heathrow Airport Terminal 5 moment - large projects which looked good on paper but had disastrous launches.

The Association of British Insurers has been critical of government and regulators' lack of readiness for the changes, while Royal London, Britain's largest mutually owned life and pensions company, said it was concerned investors would make poor financial choices.

A survey of more than 10,000 people last year by British over-50s travel and insurance company Saga (LSE: SAGA.L - news) showed 8 percent of those planning to switch from an annuity would spend some of it on a holiday.

And even if people are very prudent, they could still fall victim to scams, Wheatley told conference delegates.

"Scams and fraud, we know, tend to proliferate at the moment of maximum uncertainty," he said. "This will be the moment of maximum uncertainty."

Delegates told Reuters the problem was compounded by a lack of qualified independent financial advisers.

ANNUITY BLUES

Annuities have already felt the heat of the changes, with a drop-off in sales of 50 percent after the reforms were announced as people held off from buying one and instead waited for the rule change to go live.

That hurt insurers such as Legal & General (LSE: LGEN.L - news) and Just Retirement, and contributed to industry consolidation, led by the planned 5.6 billion pounds acquisition of Friends Life by rival Aviva (Other OTC: AIVAF - news) .

Some insurers have clawed back business through the sale of bulk annuities, insuring companies' defined-benefit - or final salary - pension schemes, but analysts still see insurance company profits falling over the longer-term because of the moves.

The need to act was stark, though, with pensioners unhappy with sinking annuity rates given the double whammy of longer life expectancy and the impact of easy monetary policy, as the Bank of England's money-printing pushed interest rates lower.

Much of the money could instead go to drawdown products - which allow pensioners to vary the amount of money they withdraw each year, with a range of insurers developing new products and cutting fees in a race to attract the new money.

And at the same time as receiving up to 10 times less income from a drawdown product than an annuity, insurers are likely to face stiff competition from asset managers.

"There is nothing to stop the asset managers developing their own drawdown products," said Jackie Wells, head of policy and research at the NAPF, who said this process was known as "to and through" - to retirement and beyond.

The industry also needs to adjust its approach to managing pensions savings to give customers the best deals, industry participants said. The "default" option most employees go for when choosing their plan is designed to lead towards an annuity, but if workers are looking to take out cash or more flexible pensions after retirement instead, those default funds should instead target higher growth assets such as equities, they said.

"It's going to evolve over time," said Stuart White, head of UK institutional business at HSBC Global Asset Management, which has pension scheme funds offering cautious, balanced and risk-seeking options.

In the end, though, pensioners still need to pay their bills and many need a steady, reliable source of income - meaning the much-maligned annuity may just need a face-lift, possibly by using drawdown for the first 10 years of retirement before switching to a fixed-rate product.

And if British interest rates start to rise sharply in the next few years, as shown by official forecasts, an annuity may not be such a shabby offering after all.

($1 = 0.6722 pounds)

(Editing by Simon Jessop and Pravin Char)