I fear that a quote from Sigmund Freud is going to ring true next year. We are all familiar with the phrase , “with freedom comes responsibility” but have the new UK pension rules offered too much freedom?
Freud said “most people do not want freedom, because freedom assumes responsibility and most people are afraid of that responsibility’’. Well, the industry and the public have been clamouring, ever more vociferously, for much needed flexibility in the UK pensions’ market.
Primary among the concerns were-
What is changing?
April 2015 is the date it all changes and the over-55s will be able to draw down their pension pots in stages, each stage 25% tax-free, in a series of "uncrystallised funds pension lumps sums". In addition, the opportunity to encash the whole fund, 25% without tax, will be possible for the over 55s.
Controls
The government will insist that advice to switch from a final salary scheme over 30,000GBP must be given by a UK regulated pension specialist, before allowing the switch. Though there appears no compulsion to accept this advice.
But, going forward after the initial transfer, the ability of pension fund members to treat their pension fund like a bank account that can be accessed at any time is now concerning professional pension practitioners.
Until recently, a final salary pension scheme was held up as the “Gold Standard“ of pensions. So, why are there concerns that those lucky enough to be in such schemes are likely to want to leave in droves?
Recently, a Glasgow based pension consultancy claimed that one in three people in final salary scheme would leave them as a result of the new pension freedoms to come into effect from April 2015. In other words, large numbers of people could be ditching certainty in retirement for flexibility that has an unknown long term cost.
In fact, there are serious concerns about the lack of regulatory control after transfer and the potential lack of advice for accessing funds at retirement or earlier from the age of 55.
Throwing the baby out with the bathwater
Imagine filling a bath with a large open plughole. Unless the taps are really full on (very high investment returns- with all the risks attached ), the bath will empty. Compare this bath with the new flexible pensions and you get an idea of the challenges.
Don’t forget, people are living longer and someone at 55 may live for 40 more years (longer than his/her working life to the age of 55). If that person dips into a pension on an unstructured way, without taking qualified, regulated and insured advice then there is a very large risk of having to rely on only state benefits for many many years.
An oxymoronic theme
As the picture at the top of the blog reminds us, ‘’ be careful what you wish for, you might get it”’. King Midas thought he had it all, until reality bit.
Freud said “most people do not want freedom, because freedom assumes responsibility and most people are afraid of that responsibility’’. Well, the industry and the public have been clamouring, ever more vociferously, for much needed flexibility in the UK pensions’ market.
Primary among the concerns were-
- The compulsion, or default, purchase of annuities (often taken without advice and regularly giving poor value and little/nothing for a surviving spouse).
- Inflexible, and often unfair, income limits set every three years on income taken from an unannuitised fund.
- High levels of taxation on death during retirement.
What is changing?
April 2015 is the date it all changes and the over-55s will be able to draw down their pension pots in stages, each stage 25% tax-free, in a series of "uncrystallised funds pension lumps sums". In addition, the opportunity to encash the whole fund, 25% without tax, will be possible for the over 55s.
Controls
The government will insist that advice to switch from a final salary scheme over 30,000GBP must be given by a UK regulated pension specialist, before allowing the switch. Though there appears no compulsion to accept this advice.
But, going forward after the initial transfer, the ability of pension fund members to treat their pension fund like a bank account that can be accessed at any time is now concerning professional pension practitioners.
Until recently, a final salary pension scheme was held up as the “Gold Standard“ of pensions. So, why are there concerns that those lucky enough to be in such schemes are likely to want to leave in droves?
Recently, a Glasgow based pension consultancy claimed that one in three people in final salary scheme would leave them as a result of the new pension freedoms to come into effect from April 2015. In other words, large numbers of people could be ditching certainty in retirement for flexibility that has an unknown long term cost.
In fact, there are serious concerns about the lack of regulatory control after transfer and the potential lack of advice for accessing funds at retirement or earlier from the age of 55.
Throwing the baby out with the bathwater
Imagine filling a bath with a large open plughole. Unless the taps are really full on (very high investment returns- with all the risks attached ), the bath will empty. Compare this bath with the new flexible pensions and you get an idea of the challenges.
Don’t forget, people are living longer and someone at 55 may live for 40 more years (longer than his/her working life to the age of 55). If that person dips into a pension on an unstructured way, without taking qualified, regulated and insured advice then there is a very large risk of having to rely on only state benefits for many many years.
An oxymoronic theme
As the picture at the top of the blog reminds us, ‘’ be careful what you wish for, you might get it”’. King Midas thought he had it all, until reality bit.