The reality of freedom and revolution is always less enjoyable and straightforward than when the concept is first proposed.
The pension world is proving no different as the reforms and freedoms, announced by the chancellor in 2014 and introduced this April, are not working as smoothly as many expected.
Those, who expected to use their pension provider as a bank, making withdrawals as and when they fancied, had clearly not read the small print. It was never going to work like that.
When the chancellor abolished the requirement to buy an annuity with your pension pot, the pension landscape changed for ever. The financial companies, whose lifeblood was providing those annuities, were always going to need time to adjust to this new world.
The chancellor, George Osborne, has pressed on with his pension changes; the only hesitant step came when his original promise of “independent financial advice” was watered down to “financial guidance” for those cashing in their pension pots.
The role of the Independent Financial Adviser (IFA) was, and is, crucial to the success of these reforms.
The government set up Pensionwise as the deadline day approached to offer the “guidance” – which generally is to go and consult an IFA. It’s a shame the Coalition government did not give IFAs a more formal role in the process; it would surely have stopped some of the headlines we are now seeing.
The problems and obstacles faced by those trying to access their pension pots has not surprised the experts. Unfortunately, those who have made spending plans on the basis of immediate access to their pension savings do not feel very liberated.
Pensions are complex; these new freedoms may have changed the rules, but they have taken very little of the complexity away.
Not surprisingly, pension companies were not too happy at having their monopoly on providing annuities taken away. Many of the larger financial companies are not giving the “like a bank account” service that Osborne outlined when these pension changes were announced.
That was perhaps unrealistic, but it has emerged that very few companies are offering what the chancellor promised in one form or another.
Big companies, like Phoenix Life, Virgin Money and the government’s own National Employment Savings Trust (NEST) do not allow partial withdrawals; NFU Mutual charges £240 a withdrawal, while Scottish Widows has a minimum withdrawal of £5,000.
There was clearly going to be a “settling-in” period for the financial institutions; not so for pension’s savers who had suffered with poor annuity rates for years. They want this new pension world – and they want it now.
So far, those is their late 50s have taken out over £2 billion from their pension pots under the new rules. Scottish Widows, which also owns Clerical Medical and Halifax, reported that in the first six weeks, 70% of those contacting them had asked to cash in their entire pension pots.
That isn’t as carefree as it reads – 85% of those requests for the full amount were for pots under £30,000. Zurich and AEGON said that the majority of those cashing in their pensions had less than £10,000 in their pot.
Those in a defined benefit pension scheme are required to take professional advice. Worryingly, some savers have been trying to get round those rules by asking for confirmation they have had a consultation, when none has taken place.
Such irregular rubber stamping, especially in schemes with defined benefits, would be folly, especially as transferring out would mean loss of valuable guarantees for life.
George Osborne would probably be high on the list of pensioners’ favourite chancellor, but he – and the Treasury – has plenty to thank the over 65s for.
Currently, pensioners are paying over £47bn in tax annually, which equates to £6,500 per retired household. That tax take is predicted to rise to £51bn by 2019.
There is a danger that by dipping into their pension pots beyond the 25% tax-free sum, savers could unwittingly push themselves into a high tax bracket.
It is hoped that appointment of Ros Altmann, a long-time campaigner for a better deal for pensioners, as the government’s pension’s minister will ensure the financial companies will provide a better pension service.
A spokesman for the Treasury said: “We have legislated to allow pension schemes to override their previous narrow rules, so they can offer the flexibilities if they want to.”
“This means there are no excuses for firms to claim their rules mean you can’t access your money.”
If the complaints continue, the chancellor could address these pension problems in his July Budget. As a chancellor in the Coalition, Osborne tore up the old pension rule-book – as a Tory chancellor, he will do all that is required to make these pension freedoms work.
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