I have been out and about talking to advisers quite a lot recently and although the pension reforms are generally well received, there are issues that advisers are coming across that mean their clients and probably many like them without an adviser are experiencing, which means they can’t access the freedoms or are having to make retirement income difficult choices.
One problem that I come across on a regular basis is that of scheme specific tax-free cash protection.
As you will remember, the member did not have to do anything to register for this protection.
The theory is that the scheme will keep a record of the member’s entitlement to tax-free cash at A-day and then roll it up with the increase in the lifetime allowance to protect the benefits they had accrued before the changes came into force.
I talk to advisers all the time that have clients in this position, which may be a great place to be, but the freedoms have brought with them a retirement income problem.
Schemes that would have members with higher than 25% tax free cash at A-day would have been occupational schemes, they historically would have only offered an annuity as an option at retirement which to this day is still the case for many. In addition, many schemes would be single member executive pension plans which again have never offered full retirement benefit flexibility.
The new uncrystallised funds pension lump sum (UFPLS) was brought in with the option for a scheme rules override to enable occupation schemes the option to offer the pension reforms, without the need to operate full drawdown for their members.
Many schemes do not have the systems capability to monitor and pay out drawdown or deal with partially crystallised funds so I can see the reasoning behind this, although many schemes have not taken up this opportunity for their members, especially if they are single member or closed schemes as it isn’t really in their interest to invest in this option.
Even for those schemes that have brought in this option without additional changes to legislation, the member could still be disadvantaged because the UFPLS cannot cope with the enhanced pension commencement lump sums (PCLS) payable under scheme specific tax-free cash protection.
UFPLS can only pay out 25% tax free and the remaining 75% of the payment is taxed PAYE, this is no good if you have scheme specific tax free cash in excess of 25% and it is likely that your client’s only other benefit option would be annuity.
The pension commencement lump sum has to be paid in association with an income from the same scheme, so it isn’t possible to take PCLS from the current scheme and transfer the residual funds to a new scheme to use flexi-access drawdown, although it is possible to buy and annuity on the open market.
So clients are still being asked to decide between using the pension reforms for a more flexible retirement or taking their entitlement to higher PCLS and an annuity.
If you just look at the tax aspect then generally the higher PCLS would be more appealing but we all know it isn’t always about the tax, especially when you are talking about locking a client into an annuity for life with the limited death benefit options that come with them.
One way to fix all of this would be to allow clients to use the same easement that was in force from the Budget 2014 to the end of the 2014/15 tax year which allowed single member block transfers, or really just a transfer that allows them to retain their PCLS entitlement. There is very little reasoning, as I can see it for the complicated block transfer rules, it only really prevents freedom of transfers which surely goes against the nature of all the changes.
There are many areas of legislation relating to pension that are preventing people from accessing the retirement they want and I urge those with the power to change this and to seriously consider a relaxation of the rules.
Claire Trott is head of pensions technical Talbot and Muir