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Pensions freedom - the right to get it wrong?

02/07/2015 by Webmaster

The flood gates are open and the pension providers are inundated by the great unwashed wanting their money. Oh dear!

From 6th April anyone over 55 can empty their pensions piggy bank whenever they want Well that is the theory. In practice there are problems with the pensions companies lack of organisation – and this change was rather thrown at them at short notice – and with the pensions companies trying to make sure they can demonstrate they followed the rules on you having taken advice and so on. It does seem rather that if you aren't following the advice you have had not to cash in your funds but decide to do it anyway, then they get a bit “grippy”.

Three months on, lets have a look at what has actually happened – but first a very brief summary of the changes:

  • You are no longer forced to buy an annuity. You can still take a 25% tax free lump sum and buy an annuity with the balance if you wish. Or you can take the fund as you wish with 25% of each tranche being tax free with the rest beng taxed as income.

  • There is consultation on removal of restrictions on buying and selling existing annuities

  • Income drawdown is more flexible; for future arrangements there is no longer a minimum income requirement

  • There are better death benefits. Beneficiaries can take a lump sum or income tax-free if you die before 75 and at their marginal rate if you die after 75 (from 2016/17 if you take it in on go). With annuities, your beneficiaries will receive the payments from a joint life, guaranteed or value-protected annuity tax-free if you die before age 75. Payments are be taxed at the beneficiary's marginal rate if you're over 75.

  • There is free, impartial guidance for all. It is called Pension Wise and it comes from The Pensions Advisory Service (TPAS) and Citizens Advice.

The new pensions freedoms are indeed being used. Withdrawals are up. The size of pots being cashed in, however, is generally small. A Telegraph Money survey said the average withdrawal was £17,000 and up to 50% were worth £10,000 or less. And "The main impact that we have evidenced from April 2015 is a significant increase in the number of pensioners enquiring about and taking trivial commutations”, confirmed Sarah Smart CA, a member of the ICAS Pensions Committee and chair of the trustee board at The Pensions Trust.

Interestingly, 45% of people are cashing in their pensions to pay off debt. People are paying off mortgages – that was possibly always their intention – and getting rid of expensive credit card debt. Planning to do that maybe makes sense. But it is a cause for concern that some people wanted the money - whatever the tax cost – and were using it to pay mortgage arrears and keep a roof over their heads. That is obvously a sensible use of the funds, but no-one should have to do that. There should be other safety mechanisms available for them. Others are in poor health and simply want to spend their money while they can.

The other 55% of people were split pretty evenly between wanting to spend money on “lifestyle improvements” and simply wanting to invest the funds elsewhere. Buy to let properties were expected to be a popular option, but a rush of funds there is not obvious.

There are a very small number of people – with pots of over £100,000 – who are cashing up and incurring very considerable tax bills in the process. Possibly they would be paying higher rate tax at some poiny anyway and just wanted to get it over with. Others may want to move their money abroad.

One source of contention has proved to be the lifetime allowance – the maximum value of a pension fund that attracts favourable tax treatment. More and more individual will now reach the lifetime allowance limit, which is set to reduce to to £1m in 2016/17. " OK, £1m sounds like a large pension fund. However more and more people will find hit this limit - particularly if they join an employer pension scheme early on.

Robert Cochran, Scottish Widows’ head of retirement, is quoted in the Telegraph  as saying “People just want the money, and don’t seem to care about guarantees, even when we highlight this for them. However, where we have to insist that they get financial advice, they tend not to go ahead with the transaction. In these cases the cost of financial advice seems to be a big deterrent when the sums in the pension are still relatively small.”

I'm really not sure what to make of that. They should be guided by advice rather than put off by it. And there is free advice available, so cost should not be important – especially for those with small sums at stake – shouldn't it? Could so many requests have been frivolous in the first place? The signs of pensions freedom being well used are not particularly good. Take Richard Parkin's comment, for example. The head of retirement at Fidelity said: “I know this sounds obvious, but it is a worry that some of our callers do not seem to grasp that if you take money out of your policy today, it will pay a lower income in retirement.” A worry indeed!

Colin MacPherson at Alan Steel Asset Management believes the changes do create a greater risk of mis-selling: "The attraction of 'money now' rather than later is a very strong one for people who are in short-term need and I believe advantage could be taken of these people. It will be very important that individuals go through a process of using the government services, as well as any further adviser input, before making any decisions on their pension pots."

For further reading see the Ian Harper's article in June's CA Magazine.

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