The Whirlwind that is Pension Reforms

Last week saw the publication of the Taxation of Pensions Bill in which we expect to find further clarification on the Chancellor’s proposed changes from April 2015.

The most eagerly anticipated of which is that individuals will be able to access the ‘tax-free’ lump sum from their (Defined Contribution) pensions as and when they want from age 55. This is a big change from the current rules which require ‘tax-free’ lump sums to be taken within 18 months of a member becoming eligible for their pension income.

We broadly support the Government’s proposals, however we question whether it is wise to encourage people to view their pensions as ‘bank accounts’, as this could result in a nasty surprise for some people when they incur higher than anticipated tax charges (up to 45%) when drawing from their pensions.

It is therefore essential that the public do not view their pension as ‘bank accounts’ as the two structures have virtually no similarities.

We are concerned that the Government’s shake up has not given due consideration to increased life expectancies, long term care, and investment risk amongst others. These issues pose problems to most professional advisers, so how does the Chancellor propose to protect inexperienced investors from making the wrong choices?

The proposed changes are only likely to be accessible to people who are invested in pension arrangements which are prepared to embrace the new changes. In reality most pensions will choose not to amend their current rules, meaning that large numbers of people are unlikely to be able to take advantage of these changes without transferring into some kind of alternative pension arrangement which has chosen to adopt the new rules. This is definitely an area where independent and impartial advice will need to be sought. Clients should be very careful and very wary when considering any pension wrapper .The new rules do not change this reality.

My personal view is that the proposed changes are likely to cause very few problems in the short to medium term, however this could cause problems for future governments if forthcoming generations choose not to make adequate provision for their own retirement.

Finally we would encourage the Chancellor to consider introducing some form of safeguard in order to help protect those who cannot afford to make the wrong decisions. If they don’t, then we may well see a rise in the number of people who become solely reliant on the state in old age. 

Philip Sutton
Senior Consultant
Telephone: +44 (0)20 7893 3456
Email: getintouch [at] broadstoneltd.co.uk