View more on these topics

Pension freedoms aren’t free — making the right decision

By Jamie Clark, Business Development Manager

With only a few weeks to go before the new pension freedoms allow people to access their pension funds as and when they like, there are concerns that the consequences of making (or not making) the right decision could put pension savings at risk. Yes, this revolution is exciting; yes, it will generate more interest in pensions than has ever been achieved over the last three decades put together. But the political imperative to get the changes in before the May election could have serious implications for individuals and the need for advice has never been greater.
Jamie Clark

In some cases, people will be taxed more than they should if they take all their money out of their pension scheme as cash using the Uncrystallised Funds Pension Lump Sum (UFPLS) route. If the pension provider paying out the UFPLS doesn’t have the individual’s tax code, they are required to apply “emergency tax” to the payment. And that means in the vast majority of cases that people will pay more tax than they should. The problem here is that people who have not received guidance or advice might assume that because they have £40,000 in their pension, they can get £40,000 out. Of course they won’t, and as 75 per cent of any UFPLS is treated as income, they might even be kicked into the higher-rate tax bracket for the very first time.

We will also have a new money purchase annual allowance of £10,000 that will apply to people who access their pension savings in certain ways after 6 April. There are additional annual allowance complications for people such as doctors and dentists who may be accruing benefits under the NHS pension scheme as well as making contributions to a private DC pension. There are lifetime allowance and income tax implications on death.

As we know, the new pension freedoms are only available from defined contribution (DC) schemes and people in defined benefit (DB) who want the freedoms will have to transfer to DB to get them. Those who want to transfer must usually receive authorised advice to the trustees’ satisfaction.

All these considerations cry out for advice but it is highly likely many of those cries will fall on deaf ears. Many people might just want the money out of their modest DC pension pot — they won’t care about advice, or guidance for that matter. For some of these people, taking their pension fund as cash might be the best course of action — if they have debts, for example. There will be others, however, who could be making a choice oblivious to its detrimental implications.

To combat these issues, the FCA recently used its emergency powers to publish new rules for providers who are approached by such people, which basically means they must be pointed towards taking advice and guidance and told about the potential risks of not doing so.

The government has set up Pension Wise to cover the guidance, but what about advice? The simple fact of the matter is that there are not enough advisers on the ground. Advisers probably won’t see the value in providing advice to people with low fund values. And of course, many people will simply not want to pay hard cash for advice. This leaves a huge advice vacuum that unfortunately could be filled by scammers and spammers.

Recommended

EU-Euro-Europe-Eurozone-700x450.jpg
1

Labour’s Andy Burnham: Bring forward EU vote to 2016

A UK referendum on EU membership must be brought forward to 2016, according to Labour leadership candidate Andy Burnham. Shadow health secretary Burnham, who is one of four candidates running for Labour’s leadership following the resignation of Ed Miliband, described himself as staunchly pro-Europe, and pledged to embrace public desire for a vote. David Cameron’s […]

27

Scott Gallacher: The painful truth about insistent clients

One of the many unintended consequences of the new pension freedoms is that, while technically people can cash in their pensions, the reality is most providers are unwilling to carry the can should things go wrong. This is most problematic with defined benefits schemes, where the existing scheme will not facilitate encashment. Instead, members must […]

George-Osborne-in-Television-Studio-700.jpg
2

Osborne to deliver second Budget on 8 July

Chancellor George Osborne is to deliver his second Budget of the year on 8 July. Writing in The Sun at the weekend, Osborne pledged the package of measures announced in the Budget would be a “Budget for working people”. The Treasury is yet to spell out how it will cut £10bn from the UK’s welfare […]

Gary-Potter-FC-MM-Peach-700.jpg
1

Asset Allocation: F&C’s Potter puts focus on talented managers

For F&C Investments’ multi-manager Gary Potter betting on talented fund managers rather than focusing on pure asset allocation is how he tries to differentiate his strategy. The £1.1bn F&C MM Navigator Distribution fund, which he manages with Robert Burdett, is “heavily influenced” by the diversification between the various underlying funds that he allocates to, as […]

Time to stop the salami slicing on tax relief

Steve Webb  – Director of Policy and External Communications As the Autumn Statement approaches, Steve Webb calls for the Government to stop tinkering with tax relief. Twice a year, in the run-up to the Spring Budget and the Autumn Statement, we face a torrent of speculation as to what changes the Chancellor might make to […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com