It’s fair to say the pension freedoms unleashed on the country by former Chancellor George Osborne in 2015 have divided opinion.
For many, the reforms represented a major step forward in boosting retirement saving, increasing the attractiveness of pensions and giving savers total flexibility over how they spend their own money.
Detractors, on the other hand, warn the changes risk stoking up a future retirement crisis, with millions more people entering drawdown – the majority without taking advice – without really understanding how to manage the risks involved.
One thing most agree on, however, is that the reforms are far from done and dusted.
Osborne’s insistence on using the pension freedoms announcement as his ‘rabbit out of the hat’ moment at the 2014 Budget – with no prior consultation and apparently only a small circle of MPs and officials involved – meant there were gaping holes in the framework supporting this monumental change.
Unfortunately, the government has shown little urgency in addressing these problems.
Emergency tax on single withdrawals
HM Revenue & Customs’ (HMRC) insistence on slapping savers who take a single withdrawal from their defined contribution pension in a tax year with an ‘emergency’ tax code, for example, flies in the face of the pension freedoms.
I have it on good authority that this approach was discussed only briefly between a small group of industry representatives (not from AJ Bell I hasten to add) and HMRC. There was no formal consultation and no serious debate.
The impact of this on individuals has already been enormous. Around £262m had been repaid to savers through the official tax reclaim forms (P53, P53Z and P55) as of September last year.
This figure is likely to be just the tip of the iceberg, however. Many of those affected – particularly basic-rate taxpayers and people who don’t take advice – will have little or no experience dealing with tax matters and might not even know the reclaim forms exist.
Anyone who doesn’t fill out the correct official form has to wait until the end of the tax year, at which point HMRC says they should get back the money they are owed.
The current approach is at best grossly unfair on savers attempting to use the pension freedoms sensibly; and at worst risks pushing those relying on the money into serious financial hardship. But the fact the decision to apply ‘Month 1’ was essentially made on the hoof and has never been properly debated is unacceptable.
We believe the decision to apply a ‘Month 1’ tax code to single withdrawals should be revisited. Instead, HMRC could allow providers to use a ‘Month 12’ tax code, with any tax underpayments clawed back by the Revenue.
Even if this approach is rejected – and it‘s worth noting the ‘Month 12’ approach was used in capped drawdown before the freedoms were launched – it seems bizarre to just carry on regardless without at the very least initiating a proper review.
Tackling pension scams
Policymakers have at least finally committed to implementing a ban on pensions cold-calling in June this year. If this fails to happen Esther McVey, the secretary of state for work and pensions, will be forced to make a statement to Parliament to explain why.
While this is clearly welcome news, the lateness of the intervention is quite something to behold.
It didn’t take a rocket scientist to work out giving people unfettered access to their retirement pots from age 55 opened up a golden opportunity for scammers, and yet three years will have been and gone before this common sense measure is in place.
We will never know how many fraud victims could have been spared by more decisive action.
Elsewhere, we still wait to see whether the Financial Advice Market Review, another pension freedoms afterthought, has any material impact on boosting access to advice, while the low take-up of Pension Wise – predicted by many before April 2015 – continues to vex policymakers.
Regulation remains a problem too, with FCA rules governing retirement income illustrations still based on a world where most people buy an annuity with their DC pot – despite roughly 2 people entering drawdown for every 1 annuity that is bought in the UK.
I could go on.
Don’t get me wrong, I’m not criticising the pension freedoms themselves – on balance overhauling a system that feathered the nests of big insurance companies and handing greater power to savers was the right thing to do. And there is no doubt the greater flexibility of DC makes the concept of pension saving much more appealing to a whole new generation of people.
But lessons must be learnt about the way the reforms were implemented and the importance of consulting properly.
Rushing ahead with the pension freedoms might have generated the headlines George Osborne wanted, but his failure to think through the consequences of the changes may have cost savers dear.
Tom Selby is senior analyst at AJ Bell