The Pension Freedom experience
In the last week or so, the press has been making a fuss about how the Pension Freedoms are actually panning out. To put this in context, George Osborne has confirmed in Parliament that some 60,000 savers have withdrawn about £1Billion from their pension pots since April.
Martin-Redman Partners writes:
Both the Mail Online and the Saturday Telegraph identify the same issues occurring for individual savers. These can be summarised as
- Pension Providers refusing to hand over savings
- Charges for advice you don’t want
- Savers stuck in limbo with no help
- Long delays
- Sky high fees and crippling red tape
- Insurers who cut the value of the pot
The Telegraph then went as far as to state five demands of providers and the Regulators, some of which seem to be startlingly centralist and authoritarian for a newspaper that sees itself as free-market and libertarian!
The demands are:
- All pension providers must offer savers ‘bank account’ type access to their money. Where providers won’t do this, they must allow their customers to switch to rival providers for free.
- Charges for making use of the new pension freedoms, per cash withdrawal for example – should be reasonable and capped.
- The Government’s default work pension provider, Nest, should offer its own range of bank account features that will be suitable and affordable, even to modest savers.
- Exit penalties for all pension savers, even where these penalties have been written into old-style pension plans, should be scrapped for every saver beyond the age of 55.
- Savers wanting to move their pension cash from one provider to another should be offered safe, standardised process where all the associated risks and costs are clear.
As IFAs we are active within this space and we can give examples of all the issues arising from 1-6 from our own client base, but I am deeply concerned about the demands issued from the Telegraph. The Telegraph article, “Pension Freedoms: now make them a reality”, Saturday 6th June 2015, puts all of the issues down to an attempt to sink the reforms as protection to the pension industry's commercial interests.
Like so many things in the political sphere, I just do not think it is as simple as that! It has been suggested that Pension Freedoms themselves are just a tax grab by the Chancellor, and the comments to the article on CityWire suggest some sketched numbers of somewhere between £150Million and £250Million on the £1Billion withdrawn to date.
The politicians have set the agenda, suggesting to the public that it is as easy as opening a savings account and will have no personal consequences outside of more cash to spend today. What has not been made clear are the nasty consequences to personal tax bills, “deliberate deprivation” on state benefit claims and the Regulator’s expectations regarding holistic advice and consumer protection. Just because a politician has said it does not make it true.
What seems to have been lost to me is an understanding of just how complex the older pension contracts are and the consequences, pleasant and unpleasant, of accessing them before the original contracted Normal Retirement Age.
Take demands 1, 4 and 5; many older schemes offer significant incentives to remain in the scheme up to the Normal Retirement Age. These include guaranteed minimum fund values, guaranteed annuity rates and significant terminal bonuses, so how could these be moved to the new regime without throwing the baby out with the bathwater! If the overall objective is the best personal income in retirement, then going to flexible drawdown early for all schemes is madness.
Demand 3 would require an enormous widening of the scope of NEST, which is, at the moment, just a collector and investor of pension premiums. Retirement from NEST requires a transfer of funds elsewhere for annuity or drawdown – there is no existing infrastructure! (And the infrastructure they do have was hardly a bargain to the taxpayer or pension member).
Demand 4 is unreasonable at so many levels; if you committed to a contract to 60, 65, 70 or 75, why should the provider let you leave penalty free? If a client changes their mind, why should they not bear the cost? As the cost of implementation is likely to come from the general funds of providers, then there will be a major cost to all holders of ‘with profit’ funds as they will not get bonuses that they might have otherwise received. Even the most interventionist government would balk at funding the costs of early surrender from the public purse!
As for demand 5, as an IFA we cannot offer a standardised process as all clients are different; life and pension circumstances vary; life objectives vary; pension schemes vary from the Byzantine to the basic and acceptable investment risk for one client would be outrageous for another.
The Regulator expects and demands that we provide holistic advice, so we cannot ignore the impact of personal taxation, the ability to claim benefits in the future and how you are intending to pay for your retirement in 5-10-50 years time. Just because you want it now is not enough for the Regulator or our professional indemnity insurers.
For us as advisers, the major issue we are facing is a slow and confused response from the providers. We spend a lot of time reading the pension contracts that clients have and identifying the most beneficial way of releasing pension income; this gets infinitely more difficult if it takes three months and more for us to see the contract! As time goes on and post Stakeholder pension plans become the norm, much of the contract complexity will leave the system, so as a plea to the politicians and the Regulators, please, no half-baked quick decisions!
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