Retirees will be able to take lump sums whenever they want and in as many withdrawals as they like under rules set to be confirmed by the government today (14 October), when it releases updated draft provisions under the Taxation of Pensions Bill.
The option, catchily titled the ‘uncrystallised pension fund lump sum’, is not a new concept and was previously announced in draft clauses of the Bill published in August. It allows savers to take lump sums from their pension after the age of 55, without crystallising the pot.
At the time, the government stated its intention to confirm rules which would give savers complete flexibility over the lump sums they can take, with the option to take regular withdrawls where 25 per cent would be free of tax and the remainder taxed as income.
Speaking to FTAdviser, Tom McPhail, head of pensions research at Hargreaves Lansdown, said savers may also be able to take the tax-free lump sum upfront, deferring the balance and possibly even passing this on to beneficiaries, which would no longer attract the 55 per cent ‘death charge’.
Existing rules restrict a pensioner’s tax-free lump sum - called the pension commencement lump sum - to be paid within 18 months of the member becoming eligible, meaning the amount has to be paid in one go.
Some consumer press articles claim the new rules represent a move to make a pension operate like a ‘savings account’. Others have said the rules are only an extension of existing phased drawdown.
Speaking to FTAdviser, Mr McPhail said the UFPLS details confirm that the tax-free element of pensions can be taken in a form of income.
He 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.
Mr McPhail said it could also see savers drawing their tax-free lump sum but deferring the taxable balance and passing it on to beneficiaries.
“People would previously have had to use phased drawdown, which is quite complicated and not many schemes have offered,” Mr McPhail added.
Claire Trott, head of technical support at Talbot and Muir, said that she did not feel this latest move was a “game changer” as currently stated and assuming no hidden caveats in the announcement, as she also pointed out it is similar to phased drawdown.
In FTAdviser’s Friday (10 October) webinar on freedom in pensions, Fiona Tait, business development manager at Scottish Life, said that to access the new lump sum individuals would need to have uncrystallised DC pension rights, a remaining lifetime allowance greater than the amount of the lump sum (if under age 75), or at least some lifetime allowance remaining (if over 75).
The UFPLS cannot be paid from a drawdown fund, or if the individual has primary or enhanced protection of lump sum rights more than £375,000.
Both Ms Trott and Mr McPhail warned that today’s announcement would pile more pressure onto providers and pension schemes.
“Again this is very late in the day for some pension providers to be able to accommodate, those offering Sipp and Ssas products will not have such an issue with facilitating it because we have offered phased options since inception,” stated Ms Trott.
Mr McPhail accused the chancellor of being “on a reckless joyride of pension reform” that could well end in the most horrendous retirement income car crash.
“The pensions industry is 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 called on the Financial Conduct Authority to pull in the other direction and ensure that the inherent risks are dealt with properly.
“At present there are precious few regulatory controls around the non-advised sale of retirement incomes. In fact it appears that the Treasury is intent on abolishing even the notion of a sales process at retirement, as investors will be able to dip into their pots at will.
“Without regulatory oversight, when investors do run out of money there’ll be no accountability for this system failure. The chancellor appears to be creating the perfect environment for a mis-selling scandal.”
This was a view shared by Kate Smith, regulatory strategy manager at Aegon, who previously told FTAdviser that the FCA needs to urgently look at this issue if the government is to progress with the UFPLS option.
UFPLS is one of three ways that savers can access their pension, as announced by the government in August. Other options include placing a fund into drawdown under a new type of fund known as ‘flexi-access drawdown’, from which consumers can withdraw any amount over whatever period they choose.
Alternatively savers could provide an income by using their pot, or a portion of it, to purchase a lifetime annuity.
