PensionsOct 14 2014

Providers warn against using pension as a bank account

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Providers have warned against the new ‘uncrystallised pension fund lump sum’ rules, warning that pensions are not bank accounts and should not be treated as one.

This follows the Treasury’s confirmation that pension savers will be able to take their tax-free lump sum whenever they want and in as many withdrawals as they like, via the new ‘uncrystallised pension fund lump sum’ rules.

Tom McPhail, head of pensions research at Hargreaves Lansdown, pointed out that in theory it means that pensions could be “used like a bank account”, and investors could receive each monthly payment in the form of a 25 per cent tax free payment, with the balance taxed under income tax rules.

However, Kate Smith, regulatory strategy manager at Aegon, warned that this is not “the same as accessing a bank account”.

She said: “As soon as people start to withdraw sums above the 25 per cent tax free cash it potentially starts to limit future pension savings, as the amount they can put into a pension each year and receive tax relief on, reduces from £40,000 to £10,000.

“Unlike drawdown, which is highly regulated, payments made as uncrystallised funds pension lumps sums aren’t regulated.

“This new income option is potentially open to abuse by unscrupulous organisations encouraging people to take their money out of a preferential tax environment and promising to invest cash on savers behalf.”

Alan Higham, retirement director at Fidelity Worldwide Investment, added that while he supports flexibility and informed access to retirement savings, pensions were never set up to be bank accounts and the reality is that many cannot and will not operate that way.

“There is an unfolding reality around the level of flexibility that those retiring next April will benefit from. To access the full flexibility, people may have to move their pensions and moving isn’t easy; it also has costs and some risks of error.”

Ros Altmann, the government’s older workers’ champion, has called on the pensions industry to make sure they can respond to customer demand for products that enable access to retirement income in-line with government reforms coming into force next April.

She said: “Instead of having captive customers coming along and buying annuities (which were often unsuitable for them or poor value) or income drawdown (often with high charges), everyone should be able to take their money out when they need it and leave the remainder invested. But currently, pension companies don’t let you do this.”

Ms Altmann argued that providers penalise or prevent taking money out freely, standing in the way of the government’s new at-retirement freedoms.

“If your provider does not offer you the option of taking some of your money and leaving the remainder behind, you will need to find another provider to move to; this can entail costs and penalties.

“We need new products that operate like pension bank or building society accounts, allowing you to withdraw funds when you need them; why should the pensions industry dictate what’s best for you.”

Mr McPhail added that the pensions industry is already reeling from an unprecedented onslaught of legislative and regulatory change.

“Some providers have even already publicly waving the white flag and calling for some breathing space; it seems the Treasury is not listening.”

He added that it could specifically be bad news for some of the low cost pension providers who have built business on the old model of developing a pension pot and buying an annuity.

“These new freedom demand sophisticated customer services and choices, many providers are going to struggle to cope.”

Andy Zanelli, head of retirement planning at Axa Wealth, also warned that retirement planning can be “incredibly complex” with many considerations to bear in mind so individuals do not end up with an unnecessary tax bill or run out of money before they die.

“People need to look beyond the headlines and think instead about their tax position and the bigger financial picture.

“Life expectancy in the UK is rising and for those people retiring at 55 and starting to access their pension, they need this money to last them at least 25 years. Greater access to the money they have worked hard to save in their pension is a positive step; let’s make sure it lasts as long as they do.”

peter.walker@ft.com