Pension lump sum tool launched amid delay concerns

Retirement software firm Dunstan Thomas has announced the imminent launch of a tool designed to help providers offer ad hoc pension lump sums on time from April, amid concerns that a number of providers will not be ready for the reforms.

The firm said it will in January roll out an add-on capability to its existing Imago back office administration package to facilitate processing of uncrystallised funds pension lump sum withdrawal applications.

The move comes amid mounting concern often repeated in the national press that providers will not be able to offer the full suite of options by the April implementation date, which has prompted some to raise the spectre of complaints over exit fees to access funds flexibly.

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Dunstan Thomas said it anticipates strong demand to come from providers which do not plan to offer income drawdown policies ahead of 6 April. It said many of these firms do want to go through the expensive process of designing and rolling out drawdown products

In October the government confirmed the uncrystallised lump sum option, which will let retirees take lump sums whenever they want and in as many withdrawals as they like after the age of 55, without crystallising the pot.

The reforms, referred to by many as allowing for ‘bank account-style’ withdrawls from pension funds, have become the most talked about element of the reforms, despite claims from some quarters that this ‘mis-represents’ the purpose of the reforms.

Life companies and workplace pension schemes previously played down claims they were not ready for new pension rules, or that savers could be hit with sizable exit fees when trying to get access to their savings.

There are several administrative complexities to offering the lump sums option, not least of which is the fact that any such withdrawal must be treated as benefit crystallisation event, according to Dunstan Thomas.

This would require a lifetime allowance test to be conducted and an up-to date valuation of the scheme-holders portfolio to be calculated.

In addition, such payments are inherently more complex as 25 per cent of each lump sum taken under this new arrangement will be tax free, provided payments into the uncrystallised policy do not exceed the money purchase annual allowance which will be £10,000.

Natanje Holt, managing director at the firm, commented that the option looks straightforward from the customer’s point of view, but for providers it’s just as complex as any other benefit crystallisation event.

She said: “The fact that a good many money purchase policy holders will also be moving their input periods adds increased administration workload at a time when product providers are already struggling to make all the changes required for operating successfully post-freedom day.”