Providers warn against using pension as a bank account

Providers have warned against the new ‘uncrystallised pension fund lump sum’ rules, warning that pensions are not bank accounts and should not be treated as one.

This follows the Treasury’s confirmation that pension savers will be able to take their tax-free lump sum whenever they want and in as many withdrawals as they like, via the new ‘uncrystallised pension fund lump sum’ rules.

Tom McPhail, head of pensions research at Hargreaves Lansdown, 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.

However, Kate Smith, regulatory strategy manager at Aegon, warned that this is not “the same as accessing a bank account”.

She said: “As soon as people start to withdraw sums above the 25 per cent tax free cash it potentially starts to limit future pension savings, as the amount they can put into a pension each year and receive tax relief on, reduces from £40,000 to £10,000.

“Unlike drawdown, which is highly regulated, payments made as uncrystallised funds pension lumps sums aren’t regulated.

“This new income option is potentially open to abuse by unscrupulous organisations encouraging people to take their money out of a preferential tax environment and promising to invest cash on savers behalf.”

Alan Higham, retirement director at Fidelity Worldwide Investment, added that while he supports flexibility and informed access to retirement savings, pensions were never set up to be bank accounts and the reality is that many cannot and will not operate that way.

“There is an unfolding reality around the level of flexibility that those retiring next April will benefit from. To access the full flexibility, people may have to move their pensions and moving isn’t easy; it also has costs and some risks of error.”

Ros Altmann, the government’s older workers’ champion, has called on the pensions industry to make sure they can respond to customer demand for products that enable access to retirement income in-line with government reforms coming into force next April.

She said: “Instead of having captive customers coming along and buying annuities (which were often unsuitable for them or poor value) or income drawdown (often with high charges), everyone should be able to take their money out when they need it and leave the remainder invested. But currently, pension companies don’t let you do this.”

Ms Altmann argued that providers penalise or prevent taking money out freely, standing in the way of the government’s new at-retirement freedoms.

“If your provider does not offer you the option of taking some of your money and leaving the remainder behind, you will need to find another provider to move to; this can entail costs and penalties.

“We need new products that operate like pension bank or building society accounts, allowing you to withdraw funds when you need them; why should the pensions industry dictate what’s best for you.”