Ken DavyMar 22 2017

Heeding the ghosts of pensions past

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Remarkably, it is only three years since George Osborne, as chancellor, dropped his pension freedom bombshell in the 2014 Budget. At the time, many of us felt it was a cynical move, aimed more at boosting the government’s coffers and election chances than meeting any real need.

While the election went the way George hoped, subsequent events consigned him to the backbenches. Regarding raising more cash for the Exchequer, I wonder what our former chancellor thought of the £1.6bn tax windfall from pension freedom from which his successor has benefitted. To put this into perspective, the Treasury anticipated about £300m of tax revenues for the first year of pension freedom, and has collected five times this.

This almost certainly means that much bigger pension pots have been accessed in their entirety, leading inevitably to large tax bills. Stories abound of people unnecessarily cashing out their tax-efficient pension funds, resulting in them paying needless amounts of tax and then sticking what is left in the bank, earning practically nothing.

One of the most worrying aspects of pension freedom is the potential problems it could be building for the future. Many can recall the last pensions debacle, when the Conservative government of the day spent millions on adverts encouraging people to transfer out of company pension schemes. Needless to say, when it came to the day of reckoning, natural justice went out the window, as the government enabled scheme trustees to wash their hands of responsibility and it was the advice sector that was left to carry the can.

We must learn the lessons of the past and ensure that any advice we give is fully documented. If we do not believe that cashing in a pension is in the client’s best, long-term interests, we must spell it out for them in simple terms and the client needs to acknowledge, in their own hand, that they are choosing to ignore our professional advice and going ahead regardless.

From the 6 April, clients can withdraw up to £1,500 from their pension fund, over three years, to pay for professional advice. Far better for many that they do that and end up keeping their pension fund intact, than rushing to cash their pension, just because our ex-chancellor thought it was worth a few votes.