With less than four weeks to go before new relaxed pension freedoms come into effect, eyebrows have been raised by the revelation that “we can’t stop fools acting like fools” was the response of one Financial Conduct Authority representative being grilled on the subject by the work and pensions select committee. The comment will do little to reassure those who are concerned that the imminent changes will leave retirees exposed to fraud, mis-selling and the loss of all of their retirement savings. If you’re among the thousands hoping to access your money, here’s what you need to know.
What’s happening?
From April 6 those aged over 55 will be able to take their entire pension pot as a lump sum, replacing the requirement for the purchase of guaranteed income through an annuity. This age limit will be extended to 57 in 2028. Within four months of the new rules coming into effect as much as £6 billion is expected to be withdrawn from the national pension pot, according to Hymans Robertson, the pensions consultancy, and 540,000 savers are expected to take advantage of the relaxed rules when they launch.
The MPs’ verdict
The select committee, which published its report this week, warned that consumers are at risk of being “ripped off” as a result of the Chancellor’s reforms to the retirement market and called for a single pensions regulator to protect savers. It also recommended that people be prevented from accessing pensions until the age of 60 to ensure that their money lasts throughout their retirement.
Myth of the ATM
When the reforms were announced much was made of the idea that people would be able to use their pension pots “like bank accounts”, dipping in whenever they chose. It has since become clear that in a lot of cases this simply won’t be possible, and many pension providers are planning to limit the number of times money can be accessed or insist that a minimum balance is maintained. In addition, a study by Which? published last week found that savers could be charged thousands of pounds in withdrawal fees. The consumer organisation found that some drawdown products charged as much as 2.76 per cent, and recommended a cap on charges for new products. In response Ed Miliband pledged that the amount that could be charged would be capped under a Labour government. For these reasons, it seems that the hole-in-the-wall pension will not be a reality for most retirees in four weeks’ time.
Bill shock
For those who are able to access their money, there is a risk of falling foul of some serious tax pitfalls. For each withdrawal, 25 per cent is tax free but the remaining amount will be taxed as income at your marginal rate. This could push you into a higher bracket and land you with a huge tax bill. Many people would be well advised to instead take a series of small sums that keep them under the higher rate threshold. According to MGM Advantage, a retirement income specialist, even someone with the average pre-retiree salary of £33,288 and a modest £20,000 pension fund would be hit. In this situation, taking the lump sum would mean that £5,000 of the pension would be tax free and £15,000 would be taxed as income. The total, £48,288, would be over the higher rate tax threshold of £42,285 and result in a bill of slightly more than £4,200 - an effective rate of 28 per cent. Those taking a larger lump sum would pay a significantly higher rate than they are used to.
Wise up
When he announced the reforms George Osborne promised that savers would be entitled to “financial advice”, but what’s on offer is “guidance” - a subtle but important distinction. It’s being provided by a new service called Pension Wise, but it won’t tell you specifically what is right for you and if you act on the guidance you won’t have the same consumer protection that you get from a regulated adviser. Pension Wise will offer consultations over the telephone, online and face-to-face, and hundreds of thousands of inquiries are anticipated when the changes take effect. Citizens Advice Bureau will provide the in-person guidance, while telephone sessions will be provided by The Pensions Advisory Service (Tpas). The website launched last month in a beta version but industry experts have expressed concern that the telephone and in-person guidance are still not available so close to the deadline.
The select committee report also warns that the guidance won’t offer consumers enough protection. Dame Anne Begg, who chairs the committee, says: “It is unlikely to be sufficient in itself to protect all savers from financial risk, particularly given how complicated pensions are for people to understand and the pension industry’s poor past record in always acting in savers’ best interests.”
This view is shared by Rona Train, a partner at Hymans Robertson: “Savers are potentially being thrown into the headlights, given the freedom to spend their pension as they wish but with no requirement to take any guidance on managing their savings. Understanding the tax implications and charges associated with different methods of drawing on savings is incredibly complex. It’s very difficult to see how Pension Wise will be able to give people the support needed to understand these options and the tax implications of any decisions they make. People need access to better tools.”
A scammers’ charter?
When the reforms were announced concerns were raised that pensioners were at risk of blowing their savings for retirement on Lamborghinis or falling victim to scammers, and the latter is a growing concern. The Financial Conduct Authority has warned consumers to be wary of companies trying to lure them into fraudulent schemes with a “free pension review” and Tpas has been working with the Association of British Insurers to raise awareness about the scams, which have increased threefold since the announcement of the reforms. The advice for those who receive unsolicited calls regarding pensions is to hang up immediately.
Look before you leap
According to research by Wealth at Work, the financial adviser, more than half of employers won’t offer the flexible pensions or don’t know whether they will have systems in place to offer them. If your company is one of these, you will have the option of moving to another provider but in many cases employers will not allow you to rejoin the main pension plan. You could be moved to a basic auto-enrolment scheme on far less generous terms, so before leaving it’s essential to check what contributions you might lose and the charges of the new provider.