RegulationAug 28 2014

Experts warn against lump sums as pension access default

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Senior consultants and providers have cautioned trustees and employers against using the new lump sum access that wa a surprise inclusion in draft legislation on the new pension freedoms as a default option for employees from April 2015.

HM Treasury recently proposed that workplace scheme members aged 55 and over should be able to access ad hoc lump sums from their pension pots without having to crysallise their pot, as a rival option to revised ‘flexi-access’ drawdown or buying an annuity.

The option could be administratively simpler for schemes, but experts from Standard Life and KPMG both warned that offering the snappily titled ‘uncrystallised fund pension lump sum’ as the default option could mean members act against their long-term interests.

Speaking to FTAdviser, KPMG’s technical services manager for pensions Andrew Scrimshaw, said that ths third option is administratively easier and can result in very different tax treatment, particularly upon death.

However, he warned firms may “not want to get involved” due to uncertaintly over the level of advice taken, or understanding of the implications of any decision.

“There are a lot of important differences from a members point of view when looking at this,” he said. “Trustees will perhaps be wary of offering these kinds of solutions in-house and in isolation, there is scope for members to act against their own long-term best interests.

“Whilst the members will have been steered towards guidance, it may be that they’ve nonetheless not taken full financial advice, so from a prudential point of view trustees might not want to get involved.”

Alastair Black, head of customer income solutions at Standard Life, pointed out that employees using this route will not be able to access their tax-free cash and leave the rest of their pension fund invested.

Each withdrawal is split between 25 per cent tax-free cash and 75 per cent taxed income, which Mr Black added could be an issue for those still working that want early access their pension savings as it could take them into a higher rate tax bracket.

Taking lump sums in this way will also reduce the annual allowance for pension contributions from £40,000 to £10,000, which Mr Black said could be detrimental to those still in work. He also pointed to a lack of regulatory oversight compared to rules around providing advice on drawdown.

Mr Scrimshaw added that the UFPLS was “a little bit out of the blue” in the draft legislation and in an already complicated environment it creates “another set of decisions for members to make, particularly with the possibility of very different tax outcomes.”

Peter McDonald, northern head of pensions at PricewaterhouseCoopers, told FTAdviser that trustees and employers need to review the suite of options for members and make sure that there is advice to members on how to use those options.

He argued that a bigger issue might be firms not communicating effectively with members where they are not able initially to offer the full suite of options and this leads to poor decisions.

“It might be that many schemes won’t be at a point by April next year that they can offer drawdown and actually that might be OK, as long as members are in a position where they know they just have to hold on for six months or a year before they draw that part of their pension.

“The real problem is where members are told that they have to buy an annuity and not told to hold on or transfer out, those members will come back, in time you can see the mis-selling complaints.”

Stephen Berry, personal finance specialist at NFU Mutual, said: “The new options will make planning more complex but potentially far more rewarding, and this makes doing your research or taking professional advice all the more important.

“All options should be considered if people are to arrive at the right decision.”