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Pensions Freedom

MAR 23, 2015

With only a few weeks to go before the new pension freedoms allow people to access their pension funds as and when they like, there are concerns that the consequences of making (or not making) the right decision could put pension savings at risk. Yes, this revolution is exciting; yes, it will generate more interest in pensions than has ever been achieved over the last three decades put together. But the political imperative to get the changes in before the May election could have serious implications for individuals and the need for advice has never been greater.

In some cases, people will be taxed more than they should if they take all their money out of their pension scheme as cash using the Uncrystallised Funds Pension Lump Sum (UFPLS) route. If the pension provider paying out the UFPLS doesn’t have the individual’s tax code, they are required to apply “emergency tax” to the payment. And that means in the vast majority of cases that people will pay more tax than they should. The problem here is that people who have not received guidance or advice might assume that because they have £40,000 in their pension, they can get £40,000 out. Of course they won’t, and as 75 per cent of any UFPLS is treated as income, they might even be kicked into the higher-rate tax bracket for the very first time. 

We will also have a new money purchase annual allowance of £10,000 that will apply to people who access their pension savings in certain ways after 6 April. There are additional annual allowance complications for people such as doctors and dentists who may be accruing benefits under the NHS pension scheme as well as making contributions to a private DC pension. There are lifetime allowance and income tax implications on death.

As we know, the new pension freedoms are only available from defined contribution (DC) schemes and people in defined benefit (DB) who want the freedoms will have to transfer to DB to get them. Those who want to transfer must usually receive authorised advice to the trustees’ satisfaction.

All these considerations cry out for advice but it is highly likely many of those cries will fall on deaf ears. Many people might just want the money out of their modest DC pension pot — they won’t care about advice, or guidance for that matter. For some of these people, taking their pension fund as cash might be the best course of action — if they have debts, for example. There will be others, however, who could be making a choice oblivious to its detrimental implications.

To combat these issues, the FCA recently used its emergency powers to publish new rules for providers who are approached by such people, which basically means they must be pointed towards taking advice and guidance and told about the potential risks of not doing so.

The government has set up Pension Wise to cover the guidance, but what about advice? The simple fact of the matter is that there are not enough advisers on the ground. Advisers probably won’t see the value in providing advice to people with low fund values. And of course, many people will simply not want to pay hard cash for advice. This leaves a huge advice vacuum that unfortunately could be filled by scammers and spammers.