Pension Transfer Experts, a leading online portal for pension news and advice, warns that the new rules for pensions do not mandate that pension administrators allow unlimited withdrawals from accounts. As such, some estimates suggest that as many as 98% of pension providers will not – at least right away. Cashing in pensions by way of a single, lump sum withdrawal may be an option available to only about 2% of the saving population.
Limited Options
A January 26 article from The Telegraphs Dan Hyde backs up the warning offered by PTE. According to Hyde's research, only a small number of UK pension administrators will allow the full range of options outlined under pension reform. Those options include purchasing annuities, participating in a pension drawdown plan, or taking a lump sum withdrawal.
Hyde explains that the problems may not be the result of pension scheme administrators being unwilling to provide total flexibility. Rather, it seems many are working toward eventually offering all of the options even though they will not be ready to do so by April of this year. This may leave hundreds of thousands of pension savers without the ability to access monies as previously planned. Any such problems could completely disrupt financial planning efforts among the UK's older workers and pensioners, at least in the short term.
If lump sum pensions aren't immediately available to those who want to withdraw their cash right away, another option would be to transfer from a current scheme into one that is already set up to allow cashing in. However, PTE warns that any such transfers could come at a high price. Pension schemes often charge exit fees and other administrative fees that could make transferring not worthwhile financially.
A Ripple Effect
Assuming that only 2% of pension administrators are prepared to offer the full range of pension access options come April, what effect would that have on other markets? There would likely be a ripple effect that could affect everything from investing to paying off consumer debt. The buy-to-let property market is but one example.
The Telegraph's Anna White reported on February 9 that some 11% of individuals approaching retirement age are planning to buy a second property as an investment. They will be taking lump sum distributions from their pensions in order to purchase rental property capable of producing income throughout retirement. Currently, just 6% of pensioners participate in the buy-to-let property market.
The anticipated surge in rental property investing may be delayed by several months until the majority of pension administrators are up and running with the full range of pension options. This could further impact the housing market by not pushing prices up as quickly as expected.
While pension reform appears to be very good for consumers in the long term, there will be some hurdles to clear along the way. PTE advises consumers to spend the next several months researching all of their options prior to making any pension decision this spring. They further advise sitting with an FCA certified financial advisor who can assist with lump sum distributions, pension drawdown, annuity purchases, and other options.
Sources:
www.moneyadviceservice.org.uk/en/articles/your-pension-lump-sum-options
www.moneysavingexpert.com/savings/pension-liberation
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