THE Government’s new pension changes are starting their way through Parliament now and they really do offer the chance of making pensions flexible and user-friendly as never before.
I just hope the pensions industry ups its game and allows people to use their new freedoms, rather than penalising them if they try to. Here are my latest thoughts.
• Everyone to have choice about how to spend their pension savings: The Government is today laying legislation in Parliament that will enable ordinary people to have complete flexibility and control over their pension savings in later life. From age 55, the aim is that everyone can have a choice about how to use their pension funds. These freedoms were announced in the Budget but they will only work if the pensions industry changes the way it serves customers.
• 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.
• Law won’t force you buy annuities or drawdown any more: In future, the law will not force you to do anything other than wait till age 55 before touching your fund. Thereafter, everyone will be trusted to use their pension fund as they decide is best for themselves. Under the old rules, only the wealthiest were able to take money out of their pension fund flexibly (paying tax at their marginal rate on all but the 25% tax free lump sum). Now that freedom should be open to everyone, regardless of how well-off they are.
• This is a huge challenge to the pensions industry: Instead of having captive customers coming along and buying annuities (which were often unsuitable for them or poor value) or income drawdown (often with high charges), everyone should be able to take their money out when they need it and leave the remainder invested. But currently, pension companies don’t let you do this.
• Pension providers penalise or prevent taking money out freely:At the moment, you are likely to find that your pension company stands in the way of allowing you the freedoms that Government wants you to have. If your provider does not offer you the option of taking some of your money and leaving the remainder behind, you will need to find another provider to move to. This can entail costs and penalties.
• I call on pensions industry to put customer interests at heart of their products: I am calling on the pensions industry to put customer interests centre-stage and allow people to use these new freedoms.
• 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.
• Time to trust people with their own money, industry doesn’t know best: Of course those used to the old ways are railing against the new freedoms. They are warning of a disaster if ‘ordinary people’ are allowed free choice over how to use their pension funds. They say people can’t be trusted to manage their own money. They say people will not realise how long they are going to live and run out of funds. They want to tell people what to do just as before. Of course there are risks and some people will be irresponsible, but I do not believe that will be the majority.
• Need guidance - or preferably advice: I think most people who have been responsible enough to save for their retirement, will also want to manage their money responsibly during retirement too. The old system was unfair and inflexible and worked brilliantly for the wealthiest, but not for the majority. The new system extends the freedoms enjoyed by top earners to those lower down the income scale. However, they will need help to decide what’s best for them and the new ‘Guidance Guarantee’ will give free help to all those nearing their pension age. This impartial guidance can help them understand more about the new rules and products, but most people could also benefit from taking professional paid-for advice to ensure they do the best for themselves.
• Abolition of 55 per cent ‘death tax’ means more money should stay in pensions for later life: The new reforms to the pensions ‘death tax’ will also protect against people spending their pension too early. Now that any unused pension can be passed on free of all taxes (at least after 2016) and inherited pensions will only be taxed as income for recipients, the money in your pension fund should be the last money you spend in your life. ISAs are subject to inheritance tax. Other savings are also usually taxable, as is your house when you pass away, but your pension passes on tax free.
• New system gives better chance of having money for care: This has major benefits. Firstly, people have a good reason to decide only to spend their pension money when they really need to.Secondly, there is more likely to be money left in later life, if you live a lot longer than you expect. Thirdly, if you reach later life and need long-term care you are more likely to have money left to pay for it, rather than relying on the state (which only provides care once your needs are ‘substantial’ and only at a basic level). In addition, if you don’t use all your pension fund yourself, you can pass it on tax free as a pension fund for future generations. This spreads the benefits of pension savings across families.
Dr Ros Altmann is a pensions expert.