Pension Clinic: freedoms for all will start in April - or will they?

Each fortnight in her exclusive blog for Money Observer, independent pensions expert Dr Ros Altmann helps you understand more about how pensions and savings work, and outlines ideas on how to make the most of pensions freedom after 5 April 2015.

Are you one of the many who have been excitedly waiting for the full pension freedoms to arrive?

Since the chancellor's Budget bombshell last March, we've all been talking about the UK pensions revolution arriving soon: being free to do what we want with our pension savings from age 55; not being forced to buy an annuity or drawdown products that have become increasingly expensive; being allowed by law to choose how to use our own money.

Most of us like the idea of being trusted to make the right decisions for ourselves, rather than being herded into products that may not be suitable. So far, so good…

Pension firms not allowing you the new freedoms

Unfortunately, we may be in for a shock. One year on, it seems that pension companies aren't quite so keen on the government's ideas of pension freedom and don't want customers escaping easily.

Recent research from Xafinity suggests only five per cent of pension schemes are planning to let members take out their pensions as a lump sum and only two per cent will offer the full range of flexibilities allowed by the law. That leaves many people facing worrying uncertainty.

You may be put in a difficult position, at risk of losing chunks of your pension fund if you want to benefit from the new pension rules, because your provider won't allow you to. You need to check with your pension firm to ask what their plans are.

Some firms will force you to transfer your funds elsewhere first, which could incur charges and penalties, and then the new scheme may charge you to set up a new pension plus an extra fee of, say, 1.25 per cent of the value, to take your money. This could mean you losing thousands of pounds of your fund, just to get your own money out.

It seems hard to comprehend that, after a whole year, pension companies have not managed to gear themselves up to allow some of the most basic freedoms for their customers. In my view, two basic services should be permitted immediately.

Let you have your money

First, if people want to take their cash, they should just be allowed to do so, without having to transfer elsewhere. Forcing customers to incur extra transfer charges and penalties hardly sits well with treating customers (particularly those who may have saved with the firm for decades) fairly.

Let you take just tax-free cash and leave the rest

Secondly, allowing customers to just take their 25 per cent tax free lump sum as cash while leaving the rest of their fund invested, rather than having to buy an annuity should be a minimum service offered by all pension providers. If they cannot do this themselves, then they should be required to transfer customers to another provider who can, without charge.

It is such a shame that pension companies have not moved quickly enough to accommodate these two basic elements of the new freedoms. Indeed, if the company can transfer your pension to another pension provider, why can't it just transfer it to your own bank?

I can understand that allowing people to take money out in small amounts, as and when they want, in bank account-style transactions might be difficult to design. This full flexibility may require them to move to another provider, but I cannot see why it should take more than a year to be able to allow customers to just have their money.

Taking cash not right for everyone - take up Pension Wise guidance before you make a mistake

It is important to add here that I'm not saying everyone should cash-in their pension fund and I warmly welcome the additional safeguards that the government and the regulator (FCA) are putting in place to help people understand the implications and risks.

The government's new 'Pension Wise' guidance service will be available to you. You can register for it here. It aims to help explain the potential risks and give you more information, particularly about the tax consequences of pension withdrawal.

But this service is not yet up and running, and many people may need more help than just the free guidance. I warned in my last Money Observer Pension Clinic that the regulator needs to do more to help customers. Lo and behold - it has happened!

Extra protections

The FCA has just announced that, from April, pension companies must make some basic checks, ask some questions and warn about the risks before customers finalise their pension decisions such as taking out their money or buying an annuity. Having called for this for so long, it is great to see it finally happening.

Many people may have good reasons for cashing in their pension fund, but don't do this without understanding that you'll be giving up great tax advantages. All the income and gains within the pension are tax-free, and the money in the fund can pass on to the next generation free of inheritance tax.

You may also lose quite a bit of any withdrawal in tax, so the amount you can spend could be much less than you expect. As long as you understand the implications, that's fine, but you need to be warned. Once you've taken your money out of your pension fund, you lose the pension tax advantages for ever.

All in all, it is such a shame that pension firms seem to have been so slow to embrace the new pensions landscape but I do hope that, in the coming months, more providers will begin to offer better choices to their customers. Make sure you find out what your company can offer you.

You can find out more about Dr Ros Altmann and her archive of articles at pensionsandsavings.com. You can follow her on Twitter via @rosaltmann.

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