Pensions Bill scrambling shows guidance success critical

It has been an exciting time to be a financial services journalist since the Budget, with the once arcane and moribund world of pensions now shaken from its savings torpor with an invigorating overhaul, which puts savers back in control of their destiny.

The downside, of course, is the pace of change: events seems to be moving so fast that even professionals in the sector are struggling to cope (see Partnership’s plaintive post-poor results remarks in our parent paper this morning); so what hope for mere hacks?

Perhaps this explains why so many were at sixes and sevens on Tuesday morning. The reports carried by several of our peers, inspired by a flood of consumer press content, of a ‘new’ bank account-style lump sum withdrawal option were wrong; the option had been announced back in August.

Several also worked in erroneous comments about savers drawing down just their tax-free cash in instalments under the ‘uncrystallised fund pension lump sum’ and leaving the ‘taxed’ portion of the fund to pass on (free of the death charge from April).

In fact, each UFPLS payment will be, as was detailed back in August, 25 per cent tax free with the remainder taxed as income.

Of course I’m being slightly self-satisfied in these comments as we on FTAdviser did not fall into the trap, which was precipitated by the government publishing the full draft of the Taxation of Pensions Bill in parliament. But I do genuinely sympathise.

For my own part I decided to familiarise myself utterly with the new rules by reading the paper top to bottom and writing a piece detailing the 10 key points. My colleagues, who watched me scratching my head and rubbing my eyes over the ensuing two hours will attest to how fiendishly complex the new rules could prove to be in practice.

The basics seem simple enough, but the tax and annual allowance consequences of various decisions are myriad and potentially pernicious

The basics seem simple enough, but the tax and annual allowance consequences of various decisions are myriad and potentially pernicious.

For example, explanatory notes on calculating the tax charge payable for those who take one of the new income options part-way through a year, run to four pages, including a long-winded case study and a cornucopia of jargon comprising ‘default chargeable amount’, ‘alternative chargeable amount’, ‘money purchase input sub-total’, ‘defined benefit input sub-total’ and so on.

Oh and by the way, the responsibility for ensuring all pension schemes with which a member has a relationship are aware they’ve triggered the lower annual allowance and are provided with all the necessary documentation, will rest with the member themselves. Yeah, that’s going to work.

Even the more simplistic decision of which product options - or, we understand increasingly in future, what combination thereof - are suitable for a real-world client with a plethora of prosaic peculiarities an HMRC official might not consider, is going to be fraught with uncertainty.

We received a number of such questions during our live webinar last week, asking for example about tax consequences of moving a pension schemes abroad in particular circumstances, or whether bypass trusts still have a place in the new world. The first of our articles giving some answers to these was published today.

All of this only goes to prove how important the guidance, promised to every member to help them navigate this unchartered landscape, is going to be. It must be suitably well informed, adequately sensitive to individual’s circumstances, and specific enough to aid real decision-making whilst encouraging full advice where appropriate.

And in a lot of the cases, especially where a member has a sizable fund, make no mistake full advice should be recommended and would be well worth the expense.

Which is why the portents emanating from a recent Legal and General pilot study in which only 2 per cent of people even took the basic guidance, or from a poll at the National Association of Pension Funds conference where close to three-quarters of the audience said members would not go on to take full advice, are so worrying.

The set-up of guidance should make it quasi-compulsory, and signposting to IFAs must include the value of using such as a service and stark warnings about what is at stake if a wrong turn is taken at this most crucial stage in a person’s financial life.

A paper is coming out in the late Autumn, which leaves very little time to get this right; but get it right we must if these commendable freedoms are not to end in catastrophe for many.

ashley.wassall@ft.com