Advisers have urged policymakers to ignore calls from Aegon to scrap a new pension withdrawal option from the Budget reforms amid growing concern about the complexity of the new rules.
Last week, Aegon called on the Government to drop the proposed ‘uncrystallised funds pension lump-sum’ option because it thinks consumers would not understand the differences between the new pensions flexibilities introduced by the Government.
In its response to the Taxation of Pensions Bill consultation, the provider added that if savers want access to cash, they could use flexi-access drawdown, which will also become available in April.
Aegon said: “We also believe it could significantly damage the effectiveness and credibility of the untested guidance guarantee.
“We believe the guidance guarantee, as currently envisaged, would have serious difficulties in exp-laining, let alone differentiating between, the two options, and the complications surrounding them. Customers, unless advised, run the risk of choosing the wrong option as they will be faced with a barrage of information which will be meaningless to them.”
Zen Financial Services IFA Mike Pendergast says: “As IFAs we’re looking for innovative products that make the process easy. I don’t think it’s a valid argument to say consumers will get confused. If they’re dealing through an IFA, they will know what the different products are.
“And if they don’t take advice it’s up to the provider to let them know what the options are.”
Dobson & Hodge financial services director Paul Stocks says: “I would be disappointed if the uncrystallised funds pension lump sum option didn’t come through.
“I’ve got clients in my head now for whom, once the option becomes available, it would be very useful.”
Ark Financial Planning IFA Philip Perry agrees there is danger “if clients don’t take advice and pick the wrong product”.
He adds: “Obviously there are tax implications and clients might not understand that.”
But MGM Advantage retirement income specialist Kevan Ramanauckis warns that UFPLS could hit advisers. He says clients may feel they can use the option without advice and funds may move out of the pension pot earlier than expected, reducing the potential for future fees.
Standard Life head of customer income solutions Alastair Black says where providers or schemes only offer UFPLS rather than drawdown, there is a danger savers could “default” into the option when it is not appropriate.
But he adds for wealthier clients or those in extremely poor health, UFPLS could be a good choice, particularly if avoiding death taxes is a concern. This is because, unlike in drawdown arrangements, any funds left after the member dies are not subject to a death tax. For drawdown, this is currently set at 55 per cent, although the Government has hinted it will come down in the Autumn Statement.
What are UFPLS?
From April 2015 all savers will be able to take uncrystallied funds pension lump sums directly from their defined contribution pensions, subject to the scheme or provider making this option available.
This is a way of removing cash from savings without having to assign remaining funds to an annuity or drawdown arrangement. UFPLS can be all of a fund, or a portion. A quarter will be tax free, with the remainder taxed as pension income, so if the saver has other income a withdrawal could push them into a higher tax band.
But there are barriers to entry. If you are under 75 there must be more lifetime allowance remaining than the value of UFPLS, and if you are over 75 you need to have some lifetime allowance left over. In this case, the tax-free part of the lump sum will be equal to 25 per cent of the remaining lifetime allowance. As with flexi-access drawdown, savers who access UFPLS will have a reduced annual allowance for pension contributions, set at £10,000.