Although widely welcomed, both by those in the wealth management profession and the clients they advise, the recent raft of reforms to pensions (sometimes known as pension freedoms) have taken the UK pensions industry by surprise, with many still struggling to cope with the sheer volume and pace of change.
Most financial commentators welcomed one reform in particular, the abolition of ‘compulsory annuity purchase’ at age 75. Except for the now dwindling number of investors whose older pension contracts contain valuable ‘guaranteed annuity rates’, most were faced with ‘swapping’ their pension pot for a ‘level of secure income’ at 75, which was less than 50% of what they could have secured 20 years earlier.
Although this particular reform, combined with the introduction of so called dependants drawdown, now offers individuals the option to ‘pass on’ their pension fund (and the ‘tax wrapper’ that surrounds it) to spouses, children and grandchildren, many of the UK’s leading pension providers simply cannot accommodate this.
One of the largest UK providers of personal and workplace pensions, for example, now writes to holders of its Stakeholder pensions, 6 months before their 75th birthday, requesting instructions as to what they wish done with their pension fund. Those policyholders who fail to respond within the required timeframe risk a dire outcome.
Firstly, the pension company will pay 25% of the individual’s pension fund to HMRC (as a tax charge), regardless of whether the individual’s pension assets exceed the current £1m Lifetime Allowance.
Secondly, regardless of the individual policyholder’s wishes, personal circumstances or (critically)their state of health, the pension company will use the remaining 75% of the pension fund to ‘buy’ a standard pension annuity.
Even those more diligent policyholders who do respond (in time) to this letter will need to transfer their pension fund, online, to another pension contract, to avoid this outcome.
Pension providers concede that, although the new ‘pension freedoms’ have been designed to allow a grandparent say to pass their pension assets to their grandchildren, some simply cannot accommodate this. There is clearly therefore still a huge gap between what the legislation allows and what pension companies can actually facilitate.
It is vitally important therefore for those with ‘uncrystallised’ pension funds (i.e. funds they haven’t yet touched), especially those between the ages of 55 and 74, to check that their existing pensions contracts are fit for purpose and that they can accommodate the new pension freedoms fully. If they cannot, remedial work will be needed, as will some decent advice, from an independent (whole of market) ‘fee-based’ pension.