Providers have revealed that demand for the new uncrystallised lump sum option, made available for over 55s to cash in their pension with from 6 April, has been limited as advisers have steered many clients to more tax-efficient alternatives.
In October last year, the government confirmed the catchily-named uncrystallised fund pension lump sum option, which lets retirees take lump sums whenever they want and in as many withdrawals as they like after the age of 55, without crystallising the pot.
This is one of four core options set out by the government to take income. The other include buying an annuity, taking the whole pot as a cash lump sum and a new flexi-access drawdown.
Martin Wigginton, head of product at Cofunds, told FTAdviser that demand for UFPLS has been low, making up around just 1 per cent of the pension payments made by Cofunds since 6 April, with flexi-access drawdown and existing capped drawdown payments making up the other 99 per cent.
“UFPLS undoubtedly has uses, but the main purpose was to offer a solution to providers who wanted to offer access under pension freedoms, thus avoiding transfers to other providers, but did not want (or were not able) to introduce flexi-access drawdown within the short period of time available before April.”
He added that market feedback suggested that it is most commonly used amongst these types of schemes, whereas flexi-access drawdown remains the clear choice amongst providers who offer all options.
In July, the Association of British Insurers published data on trends during the first 100 days since the 6 April at-retirement reforms, revealed that savers took out more than £1bn in 65,000 cash withdrawals from their pension pots, with an average size of £15,500.
These cash lump sum payments were taken via the new UFPLS route, while £800m worth in payments was withdrawn from income drawdown policies in 170,000 transactions.
Adrian Walker, retirement planning manager at Old Mutual Wealth, told FTAdviser it offers it as an option under the flexi-access drawdown proposition and has seen demand being less than what was expected prior to April.
“I think there are a few reasons for that. Firstly a lot of our customers are advised and many will have gone for more traditional drawdown with their tax-free cash and not touching the other 75 per cent.
“Secondly, we also have a small pots payment facility under our personal pension, which has been another popular route.
“Finally, for some legacy pensions, UFPLS hasn’t been the most flexible option, with customers having to cash the whole thing in, so advisers have been restructuring existing savings to avoid using UFPLS.”
Vince Smith-Hughes, head of business development at Prudential, commented that the downside of some of the early analysis which compared pensions with bank accounts meant many people went to their provider with a heightened expectation of what the new freedoms meant.
“When discovering issues such as how tax may take up much of their lump sum, or that they have safeguarded benefits which mandate taking financial advice, many have decided to defer their decision until a later date or seek financial advice.”
A spokeswoman from LV stated that it started to offer it on cases up to £30,000 in lieu of commutation rules which were removed, but most people tend to want to use flexi-access drawdown.
In July, Hargreaves Lansdown research showed that 78 per cent were opting for drawdown in May, whilst 15 per cent chose UFPLS withdrawals and just 7 per cent opted for an annuity.
Hargreaves’ head of pension research Tom McPhail noted Royal London numbers today (20 August) which found that out of 800 customers taking advantage of the freedoms, 69 per cent took all of their pension pot as a cash lump sum.
“If you’re taking a slice of a larger pot, the way you do it makes a difference in the short term, with Ufpls mean you have to stick with the 25/75 per cent split, while under drawdown you can be more flexible. I’m not sure whether people are aware of the difference when taking lump sums.”
peter.walker@ft.com
