During our FTAdviser’s On Air live pensions reform workshop last week, you inundated us with technical questions relating to specific details of the rules and what the changes to rules to access pension cash mean for your clients.
Andrew Calder asked: If a client has an existing drawdown policy will they be able to revert and in future strip out their full fund after April?
David Trenner: Yes, subject to the policy rules and the provider being prepared to change them. For example, three years after flexible drawdown was introduced a number of large providers were not facilitating it.
Samantha John asked: What are the compliance issues of having clients strip their pensions out?
DT: The compliance issues are the same as for any other advice.
Record their assets and objectives as well as their attitude to risk and priorities. Put in writing warnings about tax payable and any concerns, how they will live once the money is gone. Get them to sign off on their understanding of these issues.
Keep things very simple so that they cannot say they did not understand.
David Hill asked: Client in drawdown died in December 2013. What happens if the drawdown fund has not yet been settled to beneficiary?
DT: Tax will be based on the date of payment, so as long as the payment is not paid until after April the new rules will apply. This means the fund can be passed tax free at this time, and if the client was under 75 at death any withdrawals will also be free of tax.
Most death benefits have to be settled within two years of death, so they should have until December 2015 to take the lump sum.
An interesting question is what happens if the lump sum has already been paid and taxed: can it be returned and paid out again tax free after April? And if not, will the Financial Ombudsman Service decide someone was to blame?
Kim North asked: What are the pros and cons of non-advised drawdown? Will non-advised drawdown be allowed?
FTA: It seems entirely possible that a member could opt to go into flexi-access drawdown without advice, potentially after receiving ‘guidance’. The industry has called for the FCA to update its approach, which might give providers a steer on whether to insist on advice.
DT: Non-advised drawdown is an accident waiting to happen. While the consumer saves money on fees, they miss out on advice.
Drawdown requires decisions, such as how much income is sustainable, what happens if this is less than you require, where to hold short term funds to pay income and longer term funds to achieve critical yield?
Crucially, especially post April 2015, drawdown will require decisions as to if and when to partially annuitise and how much annuity to buy each time.
These decisions require advice.
Tony Turner asked: Will longer 10-year guaranteed periods on annuities come at the cost of much of the cross subsidy benefit?