The radical pension reforms announced this year makes the Retail Distribution Review look like “a walk in the park”, Trevor Hatton, Ernst and Young’s UK head of life and pensions, said.
Mr Hatton said the reforms have kick started a “monumental shift in how the market is structured”.
This year there have been many pension changes, with chancellor George Osborne stripping away all caps and limits on drawdown in this year’s Budget as well as proposing impartial, independent guidance for everyone that is approaching retirement, from April 2015.
Mr Hatton said: “The Budget changes made pensions the best way to save and access money in retirement. Instant access of funds does not come as a surprise, but it does kick start a monumental shift in how the market is structured and whether consumers chose to stay with their pension provider - RDR is going to be seen as a walk in the park in comparison.”
The government also announced that there will be three ways for savers to access their pension pots from April 2015.
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. Alteratively savers could provide an income by using their pot, or a portion of it, to purchase a lifetime annuity.
HMRC also unveiled a third option that will allow savers to take lump sums from their pension after the age of 55, without crystallising the pot.
More recently, the Treasury confirmed these rules for this option stating that retirees will be able to take their 25 per cent tax-free lump sum whenever they want and in as many withdrawals as they like.
Following the announcement, providers warned against the new ‘uncrystallised pension fund lump sum’ rules, saying that pensions are not bank accounts and should not be treated as one.
Mr Hatton said: “Everything in the insurer’s current operating model will need to be looked at again.
“The annuities market has already suffered at least a 30 per cent sales fall following the Budget, and that is without alternative products on the table. We expect a further drop in annuities in favour of the more flexible investment solutions.
“We have been discussing ‘retirement bank accounts’ with insurers for some time now, and are seeing the industry respond with innovation - we even expect a number of pension providers to allow customers to access their pension via cash machines and debit cards.”
Mr Hatton added it is not just traditional pensions players who have been anticipating these changes with interest, and that yesterday’s announcements open up a growing market, which is likely to be worth around £30bn per annum to non-traditional pension providers.
“Banks are possibly best placed to provide instant access to funds, but the question is do they want to play in this space? The issue of advice is still key - the race is on to find a cost-effective way of providing advice and offering enough flexibility to the customer who has an average UK pension pot. The insurer or non-traditional provider who cracks that will be in a very strong position.”
ruth.gillbe@ft.com
