Over 55s in employment need not draw pension pots just because the rules have changed, writes Ken Mann
The new so-called "freedoms" allowing more flexible access to pension pots for the over 55s are now the subject of heated allegations of a lock-down on funds by some providers.
Some pensions savers tell of companies reticent to let go of cash pots, appearing to flout rules validated in April by regulators.
We now seem set for a period of ugly mud-slinging. UK Government Pensions Minister Ros Altmann says she won't intervene for the time being, instead saying the new measures need time to settle. Settlement is the issue, of course.
They aren't known for altruism but perhaps pensions providers are protecting customers from themselves and disastrous decision-making.
Time will tell, but here I want to shine a particular spotlight on potential dangers for those accessing funds but remaining in employment, or seeking to swap pension types.
All this applies to private pensions rather than state pots and it took effect from April 6, the start of the 2015/16 tax year. In the main, it currently affects an estimated 4.5 million people with Defined Contribution (DC) schemes - where savings go into a pool with your chosen provider to purchase a regular income until you die.
The headlines in the tabloids naturally majored on the fresh potential for HMRC (the Taxman) to plunder your new-found lump sum wealth but that didn't deter 180 people at eight o'clock on the morning of April 7 from waiting in the queue at Scottish Widows' contact centre to enquire about removing funds. It has not been named as a transgressor.
Around 500,000 Scottish Widows customers, that's about a fifth of its total book, are eligible to act. About two per cent have done. On average, a customer called every 10 seconds during the first week. The average size of pot being cashed in full was less than £20,000; 85 per cent of requests were for pots less than £30k.
But Robert Cochran, Retirement Expert (that really is his title) at the Edinburgh-based Lloyds Banking Group business told me: "Most really shouldn't be taking any action. If you're 55 and you are in work there is no need for you to access your pension benefits. If you have plans for retirement, don't feel woken up to take action just because the rules have changed. It's your pension pot - not a pot of money you desperately have to get your hands on just because you've turned 55."
Whether responsible re-investment strategies are being followed isn't the issue here and, save for one element, neither are the intricacies of the tax regime. What's more important for these relatively young pot holders are more obscure risks few will consider when examining their Defined Benefit (DB) scheme - the one linked to salary and length of service with an employer.
Depending on circumstances, you can ask to swap to the now more flexible DC scheme. But should you?
"Not generally - but it depends," advises Cochran. "If you are in a scheme which is providing benefits on death in a format that rewards people who are married, and you don't have anyone who is going to benefit from that upon your death, then you might consider taking that money out so that you have some money to pass on to somebody. In that scenario there are fairly strong reasons for it."
If the employee is in an auto- enrolment scheme there is speculation that an unintentional hidden risk exists for some when drawing funds.
It could trigger the closure of that pension policy. If they remain in employment with the company and continue to pay their own contributions, it may be that they are foregoing the employer's contribution, which ceased upon closure. At a small, busy and less knowledgeable employer, it's certainly a possibility if the employee isn't aware.
Under the rules, transferring a pension with a value of more than £30k to another pension company requires the pot holder to take professional advice. Costs will vary, but £1,500 wouldn't be an unusual fee.
One last complication. If you are remaining employed, after drawing the first 25 per cent of a DC scheme the rest is subject to tax at your usual rate (the marginal rate).
However, the level of tax applied could be above your marginal rate, depending upon your lump sum drawdown amount and timing, detrimentally affecting your level of personal allowances.
Cochrane explains: "If the sum that you are taking is your entire pension fund, and it's less than £10,000, then you will be liable to [those] small pots rules - 25 per cent is free, the rest taxed at your basic rate. The provider would do that for you. If you are over £10,000 and you want to take all of your sum, or a partial pension encashment, the first 25 per cent will be tax-free, and the rest would be added on to your income.
For example, somebody who is on £30,000 a year and wants to take out £20,000 as a lump sum, 25 per cent of that would be tax-free, the rest would be added to their income and that would mean they would be pushed up into a higher rate tax band."
As soon as that happens, there's more bad news. Your employer may be asked to apply an emergency tax code. Decide wisely - if you can get hold of it in the first place.
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