OpinionNov 17 2014

Like it or not, the pension ‘credit card’ is coming

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I had initially dismissed it as euphemistic hyperbole, but it seems the ‘pension bank account’ is on the way - whether we like it or not.

Leading the Your Money section of the Daily Telegraph this Saturday was the story that Wisepensions (never heard of them? Me neither) has confirmed it will be launching what it has branded a pension fund “credit card” later on next year.

The card would apparently be used to buy goods in the same way as you might use a debit or credit card now, with balances reconciled from the pension fund at the end of the month.

The Telegraph claims many major life insurers could “develop similar strategies”, and quoted pensions doyen Steve Bee of Jargonfree Benefits describing the move as “a marvellous development and the ultimate sign of trusting people with their own money”.

Interestingly, however, when asked about such products during committee hearings on the new legislation last week, industry stalwart Adrian Boulding, strategy director at Legal and General and chairman of Pension Quality Mark, could not have been more unequivocally against the idea.

He was adamant not only that his firm would not be offering cards to access money, but that others wouldn’t either and that the whole thing had been contrived by the media on the back of soundbites which had inflated unrealistic expectations.

Responding to questions from Geoffrey Robinson, Labour MP for Coventry North West, on whether insurers would “disappoint” savers or use ‘quasi-banker’ status to ramp up fees, Mr Boulding stated: “We will not be providing a cashpoint card or a hole in the wall.”

He continued: “A pension scheme is not like a bank account. If you want to take money out, even under the new flexibilities, you have a raft of HMRC paperwork to go through, and it will take at least a couple of weeks to get the money out.

“I think consumers have been given completely false expectations by the media, and that will eventually come home to roost.

“The other thing I would say to consumers is that they can only spend the money once. I have a bank account that is topped up every month because I earn some more money in the form of my salary. This pension account can only be spent once by consumers.”

The question for Mr Boulding and other erstwhile dominant life insurers is whether they will be able to maintain this position in the face of intense pressure from upstarts like Wisepension or larger rivals in future.

As Mr Bee is quoted in the Telegraph’s piece: “The first big-name insurer to offer a similar card will have savers flocking to transfer in their pensions.”

The question for the rest of us - and for the MPs designing the rules - is whether this is even desirable. I’m not convinced; here’s why.

Taxation of these payments, which will technically be ‘uncrystallised pension lump sums’, could be fiendishly difficult for consumers to understand. Under the rules as I’ve read them, each payment would be 25 per cent tax free and 75 per cent taxed as income, subject to the appropriate thresholds.

The monthly pension statement will need to show the quarter of each withdrawal that is tax-free, any portion of the remainder that is under income thresholds and the tax due on the portion above it, in order to calculate the amount actually drawn from the fund.

It is not going to be easy to understand. I seriously doubt any pensioner will fully grasp the implications before they punch their pin code in the card machine, meaning their grasp on how they are running down the fund is questionable at best.

Wisepension says there will be a spending cap so pensioners cannot fall into debt and that it might even be able to offer people the chance to take the tax-free sums first. I think it will all need proper road testing before it is rolled out to make sure this all works as expected.

More fundamentally, I’m not sure whether this should be encouraged.

Pension funds are not like bank accounts: in most cases money will have stopped going in and the fund does not entirely belong to the customers, as fair tax has not been paid until it is withdrawn. Allowing access via your ‘flexible friend’ will provide only the flimsiest of defence.