Long live the Pensions Revolution: Six months in, what have we learned?

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Julia Grimes
Published: 01 Oct 2015 Updated: 03 May 2016

For immediate release
1 October 2015

Long live the Pensions Revolution: Six months in, what have we learned?

… Tilney Bestinvest sets out a five point reform agenda for pension tax reliefs

It is now six-months on since the biggest shake-up in the UK pensions system in half a century came into full-swing. In the run-up to the introduction of “pension freedom” concerns were raised over retirees blowing their pensions on luxury holidays and sports cars, sharks targeting people’s pension pots and suspicion that the reforms provided cover for a tax windfall for the Chancellor.

David Smith, Director, Financial Planning at leading investment and financial planning firm, Tilney Bestinvest, asks what lessons can be learned six months on and sets out the areas which remain “work in progress”.

Smith highlights the Financial Conduct Authority’s recent data collection* as providing some valuable insights, arguing there are three points of particular interest:

  • A 114% increase in the number of pension policies accessed in the first three-months of this tax year, compared to the 2013/14 tax year which was before the reforms were announced.
  • 57,568 accessed their pensions as an Uncrystallised Fund Pension Lump Sum (UFPLS), whereby 25% of the total sum is tax free and remaining 75% is taxable at marginal rate of income tax.
  • Over 82% of UFPLS withdrawals were in respect of pension funds of less than £30,000.

Smith comments: “Although many more people are accessing their pensions, some of this is likely to reflect a decision by certain individuals to delay drawing their pensions until the new freedoms came into force. It also seems pretty clear that concerns about reckless behaviour were overbaked, with the majority of pension encashment reflecting small pots. That may make sense for those who have used these lump sums to clear debts or pay-off a mortgage rather than purchasing a small annuity which will provide them with little income.”

“However, the big issue is taxation – with lump sums taken via UFPLS subjected to effective rates of up to 60%. But the haul for the Chancellor is still likely to be less than many feared based on the median numbers in the FCA’s findings. A 65-year old with a basic state pension, who accessed a £30k pension lump sum, is likely to have incurred approximately £3,600 in tax, please note workings in the appendix**. Many people in this situation could probably have reduced such a hit, simply by accessing their fund over two-tax years.”

So what issues need addressing?

Smith hones in three-areas where further progress is required.

“Providers need to get up to speed,” said Smith. “Based upon the FCA’s research*, 24% of all individuals over 55 will need to transfer to another provider in order to access flexible drawdown, and a petrifying 77% would need to change to an alternative contract with the same pension company, which can be as difficult and as elongated as a pension transfer.”

Smith also argues the rules need greater clarity for use of the freedoms to gain greater traction: “Providers are going over and above their due diligence requirements, and fear of future complaints is leading to many financial advisers being unwilling to transact certain types of transfer and pension access business. Not only should the FCA provide greater clarity on the rules for all concerned, but also afford a greater level of protection to those who transact such business in line with FCA policy.”

A third problematic area singled out by Smith is access to advice. “Pension Wise is the Government initiative created to give free guidance to individuals who may be unable to obtain financial advice. Whilst it is well-intentioned, their mandate is to simply describe all of the options, which in itself can create doubt and uncertainty. It is understandably difficult to get this sort of information to the masses and I believe the only way to ensure you maximise what your pension can do for you, is to seek specialist financial advice but too many people are now fearful of seeking financial advice, principally because of concern over fees. The reality is that fees may work out cheaper than the old commission system, and too few realise that pension related advice can be paid for out of their pension fund and not necessarily out of cash resources.”

“Despite inevitable teething problems, allowing people greater freedom over how they use their pensions is a good thing. But despite little evidence of the reckless behaviour many feared, paranoia continues to be whipped up, notably this week with the Shadow Pensions Minister Owen Smith, raising the bogeyman of a mis-selling scandal. In reality, the main issue is people inadvertently paying more tax than they need to and this is likely to occur where no advice has been taken.”

Tilney Bestinvest responds to the Government’s consultation on pension tax relief

This week Tilney Bestinvest has also responded to the Government’s consultation paper on reform of pension tax relief arguing that the current regime is overly complex but that the primary incentive for saving in a pension scheme is the upfront tax relief. In its’ submission the firm warns that “a simplified pension framework without this incentive will be more harmful than the current system” and that “we are fundamentally opposed to switching to a framework that does not include upfront tax relief”.

Tilney Bestinvest acknowledges that it is time to simplify pension tax reliefs, and has recommended consideration of the following reforms:

1. A single, finite annual contribution limit applicable to all regardless of age or income, rather an annual allowance related to tax-relieved contributions – and the scrapping of the planned earnings restrictions due to be implemented in April 2016.

2. A flat rate of relief for all which the firm suggests might be set at 33.3% paid wholly and directly into the pension than to savers directly. This would boost the value of retirement funds and simplify administration.

3. Abolition of the Lifetime Allowance, which penalises successful investment growth, undermines the attractions of pensions and leads to complexities in financial planning. The firm acknowledges there might be a case for a lifetime contribution limit instead.

4. An extension of the Carry Forward regime, to ten years in recognition that many people are only in position to prioritise savings in later life.

5. Simplification of the complicated four-tier drawdown structure (capped, flexible, UFPLS and small pots).

Finally, Tilney Bestinvest argues that pension simplification needs to be followed by prolonged period of stability, with an all-party commitment to cease further tinkering, coupled with a robust and effective education programme to strengthen public confidence in the pension system.

David Smith is available for further comment on pensions and financial planning topics at 0191 269 9971 david.smith@tilneybestinvest.co.uk

* FCA pension freedoms data collection exercise: analysis and findings - September 2015

** The 60% tax rate refers to a band of income (over £100,000 in the tax year) which results in the reduction of personal allowance. The cumulative effect of 40% income tax plus removal of personal allowance on each £1 above £100k earned results in an effective rate of 60% tax.

With regards to the 65 year old, we have assumed he has nothing other than the basic state pension in the current tax year (£115.95 per week / £6,029.40 p.a.). This will leave him with approximately £4,570.60 of his personal allowance:

£30,000 lump sum (£7,500 tax free / £22,500 taxable)

Tax Free Lump Sum £7,500

£4,570.60 at 0% tax (£0) £4,570.60

£17,929.40 at 20% tax (£3,585.88) £14,343.52

(£3,585.88) £26,414.12

So tax is £3,585.88 and total proceeds from £30,000 lump sum is £26,414.12.

Please note this this disregards the likelihood that the individual may be hit with an emergency rate tax code at outset meaning a substantially higher amount of tax than this, but one would expect the individual to be able to reclaim the excess tax paid in that instance. Example is for illustrative purposes only.

- ENDS –

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Important information

The value of investments, and the income derived from them, can go down as well as up and you can get back less than you originally invested. This article is not advice to invest or to use our services. Prevailing tax rates and the availability of tax reliefs are dependent on your individual circumstances and are subject to change. Please note we do not provide tax advice.

Prevailing tax rates and reliefs are dependent on your individual circumstances and are subject to change. SIPPs are not suitable for everyone. If you don’t want to invest across different asset classes or don’t think you will make use of the investment choices that SIPPs give you then a SIPP might not be right for you. Self-directed investors should regularly review their SIPP portfolio, or seek professional advice, to ensure that the underlying investments remain in line with their pension objectives.

It is important to consider all of your options, especially in light of the new pension reforms. If you are unsure of your options you should seek professional financial advice or visit http://pensionwise.gov.uk.

About Tilney Bestinvest

Tilney Bestinvest is a leading investment and financial planning firm that builds on a heritage of more than 150 years. We look after more than £9 billion of assets on our clients’ behalf and pride ourselves on offering the very highest levels of professional client service with transparent, competitive pricing across our entire range of solutions.

We offer a range of services for clients whether they would like to have their investments managed by us, require the support of a highly qualified adviser, prefer to make their own investment decisions or want to take more than one approach. We also have a nationwide team of expert financial planners to help clients with all aspects of financial planning, including retirement planning.

We have won numerous awards including UK Wealth Manager of the Year, Low-cost SIPP Provider of the Year and Self-select ISA Provider of the Year 2013, as voted by readers of the Financial Times and Investors Chronicle. We are pleased that our greatest source of new business is personal referrals from existing clients.

Headquartered in Mayfair, London, Tilney Bestinvest employs almost 400 staff across our network of offices, giving us full UK coverage, and we combine our award-winning research and expertise to provide a personalised service to clients whatever their investment needs.

The Tilney Bestinvest Group of Companies comprises the firms Bestinvest (Brokers) Ltd (Reg. No. 2830297), Tilney Investment Management (Reg. No. 02010520), Bestinvest (Consultants) Ltd (Reg. No. 1550116) and HW Financial Services Ltd (Reg. No. 02030706) all of which are authorised and regulated by the Financial Conduct Authority. Registered office: 6 Chesterfield Gardens, Mayfair, W1J 5BQ.

For further information, please visit: www.tilneybestinvest.co.uk


This release was previously published on Tilney Smith & Williamson prior to the launch of Evelyn Partners.