Freedom in four months

Natanje Holt

Natanje Holt

As we edge closer to Freedom Day in less than four months’ time the scrutiny of upcoming legislation which is linked to Pension Freedoms has begun.

One key concern was the conflicting demands of two pieces of linked legislation – The Pensions Schemes Bill tabled by the Department of Work and Pensions and the Taxation of Pensions Bill which comes from HM Treasury. The Taxation of Pensions Bill will require DC scheme members to tell the relevant scheme provider within a month of accessing their pension ‘flexibly’.

Flexible access through one of the following methods:

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1. Flexible Access Drawdown (FAD)

2. Uncrystallised Fund Pension Lump Sum (UFPLS) withdrawal

3. Standalone lump sum

4. Breaking capped drawdown limits

…triggers a massive drop in Money Purchase Annual Allowance (the amount you are allowed to put into your DC pension per tax year, free of tax implications) from £40,000 to £10,000, all designed to prevent tax abuse.

Meanwhile, the FCA quietly announced that they are to consult on fresh rules around drawdown and lump sum withdrawals. Presumably the results of this consultation will be brought through quickly enough to produce new finalised guidance before Freedom Day. Early indications are that UFPLS will be made subject to the same regulatory scrutiny as income drawdown but, as Tom McPhail of Hargreaves Landsdown points out, there is a dilemma here. Put simply, because there is no actual product sale associated with UFPLS these withdrawals are not exposed to the same regulatory scrutiny. It remains unclear exactly how this will be addressed and there is only four months left to put these safeguards in place.

Providers of course do not want to be left as the policemen of these withdrawals without the rules to ensure sensible withdrawals that do not expose members to large tax bills or destitution in later retirement. Providers already have concerns that the allure of DC pension freedoms come next April may persuade DB scheme members to convert over to DC – something which is generally considered to be a bad idea. Providers understandably want assurances from the FCA that should DB to DC migrations increase directly as a result of the new DC access freedoms they will not be held to account when members discover they are worse off down the road.

We think providers may struggle to offer UFPLS anyway without investment in new technology. New FCA rules, set to come through just before April 6 2015, puts up another hurdle to smooth administrative processing of these new flexible withdrawals, unless providers get access to the latest tools.

As if all this was not enough for providers to be getting on with, the FCA has just launched its Retirement Income Market Study (or MS14/3.2) which summarises some additional reforms that it plans to push through over the next year or so:

1. The regulator wants annuity product providers to offer product comparisons within annuity quotes. It suggests that the MAS annuity comparison tool might be used to provide this comparative data, as well as