As the industry braces itself for the biggest reforms anyone can remember, advisers and providers are understandably jittery at the potential for systems failures, mistakes and blocked communication channels. John Greenwood reports
The lateness of the publication of regulations on guidance, notably the second line of defence, means providers, advisers, employers and schemes have had very little time to prepare for the predicted onslaught of cash-hungry scheme members.
Pensions professionals are taking a pragmatic view of the likelihood that not everyone is going to be able to exercise the full flexibilities provided for in the regulations from day one. Of greater concern are the pockets of the market where individuals will make poor, irrevocable decisions that could come back to haunt them and the organisations that facilitated their transactions.
For LCP partner Andy Cheseldine, an area of serious concern is the group of people who could be entitled to more than 25 per cent tax-free cash – but do not know it – and take their benefits under an uncrystallised fund pension lump sum (UFPLS).
Cheseldine estimates that between half a million and a million people could be entitled to more than 25 per cent tax-free cash, largely those who have been in trust-based DC schemes pre-2006 or who transferred out in Section 32 plans. He says what he has seen of providers’ systems gives him no confidence that they are in a position to identify who is affected and guide them correctly.
“This is an issue that may not come to the surface until around three or four years down the line when ambulance-chasing firms start telling people how much cash they have missed out on as a result of not being properly informed about their pension benefits,” says Cheseldine. “Under the second line of defence, providers and schemes are not required to actively ask people about this.”
While the second line of defence moved the goalposts in January, another big area of potential detriment for those taking advice or guidance on their withdrawals was created just weeks ago in the Budget with the announcement of the intention to create a secondary annuity market.
Withdrawals of pension funds with guaranteed annuity rates (Gars) are, since the Budget, a bad idea and anyone taking them is crystallising an unnecessary loss when they could take the income and resell it for more than the pure fund value on the secondary annuity market. That presupposes that the market will happen, and that competitive terms will be offered, but a wait-and-see approach at the very least will be advisable.
Just Retirement director Steve Lowe says: “Technically speaking, nobody should now take a Gar – they need to wait and see what the market will be able to offer them.”
For Gallagher Employee Benefits head of consulting Nick McMenemy, the biggest unknown is consumer behaviour among employees’ reaction to Pension Wise.
He says: “Are they going to go through Pension Wise and come out with more questions than when they started? And if so, how is that going to translate into the volume of enquiries that employers’ HR departments are going to have to deal with? This is new territory and we simply don’t know.”
Scams are another area where advisers feel the current structure is far from strong enough. The FCA and The Pensions Regulator have been upping their communications in relation to pension fraudsters but advisers are worried that this will not be enough to stop some people getting sucked in.
LEBC chief executive Jack McVitie is also concerned that some individuals will end up paying considerably more tax than they need to. He thinks the issue is so serious that a 30-day cooling-off period is needed for people accessing their pension cash where they have done so without impartial, regulated, independent advice.
In an open letter to FCA chief executive Martin Wheatley, McVitie says: “In order to safeguard these individuals from potential disappointment and to ensure that the access reforms are successful, we would ask the Government to consider an amendment to the current requirements for access to pension funds where no regulated independent advice has been taken.
“This could include a 30-day cancellation period in which the consumer could be given a simple statement outlining the tax liability due on the funds to be paid out, and a warning about the need to preserve pensions for longer-term income needs. This period for reflection might also recommend that, if unsure about their options and the longer-term impact on income, they should consider seeking independent, regulated advice before progressing further.”
Cynics would say that the last thing the Government wants is for people to be helped to pay less tax – the net gain to the Treasury from the reforms in the early years is predicated on people withdrawing more sooner than they would have done.
But unless taxation issues, scams and the cheap surrender of guarantees are addressed, attitudes towards the reforms could harden significantly.