One hundred days into pensions freedoms should be good news, says David Piltz, head of Trustee Services, Buck Consultants at Xerox. However…
The current storm around pension freedoms was created when Friends Life indicated that it would not be making all the freedoms available to its customers and they would have to transfer out their defined contribution pension pots, should they wish to use some of the additional freedoms. Put simply, they were not going to operate pension pots like bank accounts. I am struggling to see why this was such a big surprise. I can understand the government wanting its pension freedoms to be a success, but they have been introduced quickly, no one in the industry was expecting the bombshell the government dropped in March 2014, and it will take time (perhaps years) to bed down.
The Pensions Minister, Ros Altmann, has subsequently said the government will not immediately intervene to compel pension providers to deliver the full range of pension freedoms. Her sensible suggestion is that we should give the reforms a chance and wait and see how they work. We are after all less than 100 days into the new regime. “Let's be clear – pensions systems have been set up for decades on the basis of either one lump sum at retirement or a series of regular monthly payments through payroll. They have not ever had to operate like a bank account. High street banks have honed their accessibility and technology over the same decades, it is no surprise that bank accounts are now very efficient.
Pensions are a highly technical area; those administering and providing pensions have to deal with the taxation applied to pensions on retirement (remember pensions are tax efficient on contributions and investments (partially) but not at retirement outside the 25 percent lump sum). Banks don't, and ten minutes with an experienced pension administrator makes you realise how complex the taxation rules in the de-accumulation phase are. There is not a tax consequence every time you use a bank’s cash machine to get out £50, but there would be for a pension scheme being used as a bank account.
Banks make huge profits through charges for unauthorised borrowing, interest on authorised borrowing etc. all this allows them the run bank accounts in general for free and to provide free and instant access to money held in bank accounts. In many cases bank rates are well over 10pc APR unsecured and well over 3 percent secured. By contrast, charges in pension arrangements are capped at 0.75 percent p.a. for the default auto enrolment funds and generally under the microscope – they also have to cover a large spectrum of charges such as administration and investment management, whilst the investment performance has to transparently pass the member in totality.
These are just some of the reasons why the Pensions Minister is right to take time to see how the new system will evolve rather than taking action which with hindsight will prove to have been heavy handed. Pension providers warned the government that they would struggle with the pace of change. You cannot expect total freedom to be in place today. It has been reported that savers were being prevented from making withdrawals of less than £5,000, are being limited to three or four withdrawals a year and have been denied access from funds worth less than £30,000. If we look at this from the other side, less than 100 days into the new regime, savers are being allowed to make withdrawals of £5,000 or more, can make withdrawals three or four times a year and can have flexible access to funds worth more than £30,000. I would say that’s a pretty good start, given for example the tax complications and cost to the provider of each withdrawal.
