Following the Treasury’s announcement last week in which they confirmed yet another change to the pension system, iExpats has broken down the specifics to assess exactly what the impact – and further impact – of this latest amendment will be.
The Change
The former restriction on the lump sum payment of pensions has been removed. Previously, the lump sum had to be paid within the first 18 months of retirement, up to six months in advance of eligibility, and up to 12 months after. This meant that pension investors had no choice but to take the lump sum in one go.
The removal of this restriction means that pensions could essentially be used like a personal bank account, with savers dipping into their pension as and when the need takes them.
It could also mean that 25% of each monthly pension payment will be tax free, while also allowing investors to draw the lump sum tax-free, then deferring the balance (which is taxable) and arranging for this to be passed onto beneficiaries upon death.
In essence, this latest change has lent a great deal of flexibility to UK pensions –at least in theory.
The Risks
As with any pension legislative measures, there are winners and losers. At risk this time around are the millions of pension savers being encouraged to draw their pensions at their own free-will. While we would never suggest that the majority of investors will find they eat away at their funds in excess before their time, it is likely to happen to some.
Some investors may also be the target of UK “investment experts” who offer to guarantee the longevity of their funds. At this stage there is little in the way of regulation around the sale of retirement incomes. The Treasury has basically opened the door to a potential mis-selling scandal, as with the abolishment of regulation on the lump sum aspect, pension investors are free to do as they wish – and if they run out of money through bad non-advised investments, which some will, who will be held to account? Nobody.
The Casualties
The annuity market is about one nail away from a sealed coffin now. This is a pity as in all truth the annuity option used to be an extremely efficient methods of spreading risk and capital to guarantee the pension would not run dry before time. It’s just a pity that the providers refused to listen to the repeated warnings around the exorbitant charges.
Smaller pension providers will; struggle to adapt to this latest change as their entire business model is built on the old system. Building a pension pot and then buying an annuity. The new method is far more involved and will certainly create issues for a few notable providers.
In Conclusion
This legislation will start in April 2015, when a whole host of other amendments are made too. The chances are that the majority of providers won’t be ready to offer their policy holders this benefit in time for the deadline. Many are already on their knees after the raft of amendments through this year and have begged for a bit of time to adapt to the existing measures before yet more are thrown at them. The message was not received it would appear.
Overall, pension system changes are embraced by iExpats. The previous model was outdated and restrictive, and if handled correctly – and fine-tuned – these amendments have the potential to completely revolutionise the under-funded sector. People will be more interested in planning and saving long-term in light of the fact that things appear much more transparent than in previous decades. The freedom afforded to the system are also likely to be of great appeal to those who would probably have rather kept money in their account as oppose to invest.
The danger is of course that the Chancellor is certainly a reforms enthusiast. Yes, he’s keeping us all on our toes and it’s interesting to watch, but where will it end? Change is good, but too much change at once could be catastrophic. We wait in anticipation of the next sweeping reform…..
