The radical reforms being introduced to UK pensions could prompt a furious “land grab” among providers as new products develop, a City lawyer has warned.
Speaking about the Treasury’s Taxation of Pensions Bill, which detailed new rules allowing people aged 55 or older greater flexibility to take their tax-free lump sum from their pension pot, Simon Laight, partner at City law firm Pinsent Masons said: “The government wants the industry to deliver low-cost flexibility.”
The changes have been described by some observers as allowing over-55s to treat their pensions like a bank account.
Mr Laight said: “We will see a land grab as providers rush to develop new banking-style pensions and seek to capture market share. It is a dash for cash.”
But he warned that catering for smaller pension pots and adding flexibility may require “expensive new systems” from competitors with scale.
Under the changes outlined in the Bill, people can take a series of lump sums from their pension fund, with 25 per cent of each payment tax-free and 75 per cent taxed at their marginal rate, without having to enter into a drawdown policy.
Chancellor George Osborne said: “We have extended the choices even further by offering people the option of taking a number of smaller lump sums, instead of one single big lump sum.”
Ros Altmann, who serves the government as its older workers business champion, said: “These freedoms were announced in the Budget but they will only work if the pensions industry changes the way it serves customers.”
However, this could make defined benefit schemes less attractive. Research among 2,036 employees aged between 50 and 64 by Towers Watson revealed that 9 per cent would be interested in exchanging most or all of a DB for a defined contribution scheme under the flexible rules.
Will Aitken, a senior consultant for Towers Watson, said: “Transfers can only grow in popularity, especially now that less tax will be due when unused DC pensions are passed down the generations.
“However, it would be foolish to predict a stampede to the exits.”
In a seven-page Pension Protection Fund update, PPF 7,800, the body revealed that there were approximately 6,150 DB schemes in the UK.
Mark Wood, chief executive of JLT Employee Benefits, described the lump-sum rules as “the last panel in the government’s 2014 savings triptych”.
But others were more cautious. Morten Nilsson, chief executive of Now: Pensions, said: “A balance needs to be struck between flexibility and responsibility. Achieving this is not easy, but the government needs to be more consistent and coherent in its approach, focusing on the entire pension saving journey.”
| Timeline: pensions reforms |
October 2012: Auto-enrolment comes into force. March 2014: George Osborne announces his Budget with plan to introduce freedoms on drawdown from pension pots, making people less reliant on using an annuity for retirement income. September 2014: The chancellor says pension funds paid out before or after the age of 75 would no longer be subject to the 55 per cent tax charge when transferred as a lump sum within a pension. April 2015: The death tax and pension reforms come into force. |
Adviser view
Alan Higham, founder of Buckinghamshire-based Retirement Angels and retirement director for Fidelity Worldwide Investment, said: “To access the full flexibility, people may have to move their pensions and moving is not easy. It also has costs and some risk of error.”