The Chancellor’s 2014 Budget was the catalyst for a seemingly never ending series of headlines on pensions tax usually reserved for, well, less staid topics. Now the countdown is on to when the new ‘sexy’ pension freedom regime comes into effect.
Terminology is the first thing we need to familiarise ourselves with.
Flexi-access drawdown rolls off the tongue and is pretty self-explanatory. However, uncrystallised funds pension lump sum (UFPLS) unfortunately does neither and may just be an unnecessary complication.
Armed with either of these options, a member can access the funds held within their personal pension but flexi-access, as the name suggests, allows considerably more control as you are able to take all or part of your pension commencement lump sum without having to take the associated income.
Meanwhile, a UFPLS means you must take both the tax-free element of 25% and the associated income, while also triggering the £10,000 money purchase annual allowance.
Although this is generally great news for those looking for greater control over the retirement income, we need to acknowledge the fly in the ointment.
‘The bank account problem’
Namely the suggestion that defined contribution pension pots can be treated like ‘bank accounts’, with individuals dipping into them whenever they want and taking out as much as they choose as this simply fuels the premise that many people will be tempted to drain their funds if there is an unforeseen emergency, or a luxury that can’t be resisted.
Unfortunately, in the case of the person’s pension pot, there is little likelihood they will be able to replenish it, and then it becomes a question of “what do I do now?”
But before we even get to that point, it needs to be remembered that there is no statutory requirement for a provider to facilitate the proposed flexibility from 6 April.
Indeed, many providers may struggle to offer these transformational changes at such short notice as there was also little in the way of prior consultation.
Pensions are not bank accounts: generally they are regarded as the deferment of income from the individual’s working life. As such, most providers operate the payment of income benefits through a payroll system, deducting the appropriate rate of tax before paying the income to the individual.
Most people wouldn’t expect payroll to make ad hoc payments of salary as and when the individual wanted an advance, and yet this is exactly what pension providers will have to accommodate from April.
To do so, and to satisfy the numerous HM Revenue & Customs reporting requirements, most will have to reconfigure their IT systems.
Many legacy products and IT systems were never structured to offer such flexibility and the cost/benefit for the provider to reconfigure their system may be such that many may choose, for commercial reasons, not to offer this flexibility.
For our part, this is a heads-up that come 6 April, we’ll be offering “flex max”: maximum flexibility across investment options, contributions and withdrawals, complementing 20 years’ worth of self-invested personal pension innovation.