Treasury to unveil ‘bank account’ flexibility for over-55 pensions

Over-55s will be able to access their pensions accounts like their bank accounts under flexibilities expected to be unveiled by the Treasury today.

The Treasury is expected to remove the restriction that requires the tax free lump sum part of a pension entitlement to be paid within 18 months of the member becoming eligible for their pension income. It will facilitate the drawing down of part tax-free cash, part taxable pension over an individuals’ retirement.

Under current rules, tax-free cash can be taken either 6 months before or 12 months after the commencement of the income. The new rules will come into effect from April 2014.

Pensions experts say that in theory this means pensions could be used like a bank account, with investors dipping in to draw income at will. Investors could receive each monthly payment in the form of a 25 per cent tax-free payment, with the balance taxed under income tax rules

It could also possibly mean investors drawing their tax-free lump sum but deferring the taxable balance, which could then be passed on to beneficiaries on death and could potentially avoid any tax charge. 

The Government’s older people champion Ros Altmann has called on the industry to use the new flexibility to make pensions like current accounts that over-55s can dip into when they want.

Altmann says: “Extends flexibility and freedom to everyone, not just the wealthiest: Up till now, the UK has had a most inflexible pension system – only those with tiny or huge pension funds were able to just out take money as and when they needed to. The law required most of us to buy one of two products – an annuity or income drawdown – and as soon as you wanted to take any money at all from your fund, you were caught by this inflexibility. Pension companies had it easy – they just sold annuities or drawdown products without really needing to worry about what was best for their customers.

Let’s have pensions that work like bank or building society accounts from age 55: We need new products that operate like pension bank or building society accounts, allowing you to withdraw funds when you need them. Why should the pensions industry dictate what’s best for you?”

Hargreaves Lansdown head of pension policy Tom McPhail says: “Will pension providers be ready to give their members and policyholders the benefit of these new freedoms? In many cases no they won’t. The pensions industry is reeling from an unprecedented onslaught of legislative and regulatory change. Some providers have even already publicly waving the white flag and calling for some breathing space; it seems the Treasury is not listening.

“Millions of pension savers are being encouraged to withdraw their money at will. This is fine as far as it goes, but managing longevity and investment risk is complicated, particularly if you have been defaulted into a pension, you’ve never engaged with it and you don’t know what you’re doing. Many professionals struggle to get it right so the idea that at least some inexperienced investors won’t get it wrong is recklessly naïve.

“You can ‘insure’ an investment fund to protect it from falls in capital or income. These guarantees are very expensive. Typically the guarantee alone costs more than the whole of the charge cap for auto-enrolment workplace pensions. So they could more than double pension charges.

“Investors may be persuaded to hand their money over to investment experts, who will promise to smooth out the investment and longevity risks for them. A few will succeed, many will fail.

“At present there are precious few regulatory controls around the non-advised sale of retirement incomes. In fact it appears that the Treasury is intent on abolishing even the notion of a sales process at retirement, as investors will be able to dip into their pots at will. Without regulatory oversight, when investors do run out of money – and some will – there’ll be no accountability for this system failure. The Chancellor appears to be creating the perfect environment for a misselling scandal.”

JLT Employee Benefits chief executive Mark Wood says: “The distorting effect of the 25% tax free withdrawal only being accessible as a lump sum has been removed. At a time when it is accepted that, despite auto-enrolment, pension contributions are still woefully inadequate for millions, over the long term this should encourage people to preserve the fullest retirement pot possible.

“This is the last panel in the Government’s 2014 savings triptych. Flexibility is the key theme and, in conjunction with the annuity reforms at the budget and the removal of ‘death tax’, it further enshrines the notion that savings are “my money” to do with as people wish, rather than being steered by tax.”