A pensions shambles explained

29 July 2015
The industry's ability to bend to the new pension flexibilities has come in for a bit of bad press. Here we look at what's actually been delivered and the benefits clients can expect to see.

Nearly a quarter of a million payments worth £1.8billion were paid out in cash from pensions in April and May of this year,1 and yet the implementation of pension freedom has been dubbed a "shambles" by the popular press.2 Is this fair?

Uncrystallised Fund Pension Lump Sum (UFPLS)3

We did it!

Prior to April 2015 the ability to withdraw pension savings in the form of a single cash lump sum was, other than in some very specific circumstances, prohibited by legislation. No one was able to offer it, and no one had built the systems to allow it.

Pension providers were given 12 months to build and implement the necessary systems, a very short timescale in pension terms. However most of the major pension providers were able to manage it for their mainstream products, despite the fact that some of the rules were still being confirmed in the month of 'launch'.

The reason behind the headlines is that not all providers managed it, or not for all of their products. This was never going to happen without a statutory override which would have forced providers to offer the new options rather than simply making it possible for them to do so; a situation that would be not unlike forcing manufacturers to add new technology to every product they'd ever sold. Apple and Samsung don't upgrade existing models every time they launch a new app or upgraded model, it would be commercially unacceptable.

As a result Royal London offers full UFPLS from all of its pension products and partial UFPLS from all contracts with a partial vesting facility already built in.

Clients with older products can access it via an internal transfer to Income Release.

Timescales

There have also been headlines regarding the length of time people have had to wait for their money.

Royal London had an existing service standard of 5 working days from the receipt of documentation to pay out a lump sum at retirement and in the main we have kept to this.4

Providers who are unable to fulfil similar timescales were probably unable to do so before the new legislation which has now (deservedly) drawn attention to the situation.

Should we pay out money quicker than this? Media reports referring to pensions as 'bank accounts' have fuelled expectations of instant access and cash point-style payments. Quite apart from the extremely practical consideration of having to apply the correct taxation at the point of exit - something which ordinary bank accounts do not have to deal with - there is also the question of whether pension savings should be this easy to access.

Pensions are long-term savings plans designed primarily to provide income in later life. Giving people the choice of how to withdraw their savings is one thing, making it look like free spending money is quite another.

Advice

Lastly we have complaints that providers are forcing people to take advice before they can have their money. So that rather than a valuable benefit, financial advice is actually seen as a barrier.

Royal London firmly believes that individuals dealing with the difficult decision of how (and when) to start spending their pension should take financial advice in order to identify the method most likely to suit their circumstances now and for the remainder of their lives, and we make this clear in our literature.

However the only situation where we insist on it is where there is a legislative requirement for us to do so. It is after all the client's own money and, while we have a duty to protect their interests, we must remember this.

Flexi-Access Drawdown (FAD)

Flexi-Access Drawdown is much harder to offer than UFPLS, for the simple reason that payments are ongoing. Drawdown requires an income payment system and not all existing pension products have one, being initially designed for what is now termed 'accumulation'.

Providers who wish to be active in the 'decumulation' market already offered income drawdown prior to the freedoms and have adapted their systems to offer FAD. Those providers and products which never offered drawdown will find it much harder to do so now.

Royal London offers FAD for all new drawdown clients and will maintain capped drawdown for existing Income Release clients, including the facility to make ongoing contributions.

In summary

  • Most major pension providers offer UFPLS on their current product offering, and for legacy products where it is possible to do so without building new systems.
  • Royal London continues to offer a service standard of 5 working days to pay a cash lump sum at retirement.
  • Royal London strongly recommends taking financial advice when accessing pension funds but does not make it a condition of access except in cases where the requirement is written into legislation.

Notes

1 Source: ABI news release 15 July 2015
2 Daily Mail "What a pensions shambles! ..." 9 June 2015
3 Incidentally pension providers were not responsible for this piece of admirable "Finglish", the term was first used by the Treasury in their July 2014 paper outlining the draft legislation.
4 The exception was during the immediate surge after 6 April.

About the author

Fiona Tait

Pension Specialist

Fiona joined the life and pensions industry in 1989. She is a Fellow of the Personal Finance Society, an Associate of the Chartered Insurance Institute and is currently Vice-President of The Insurance Society of Edinburgh. Fiona specialises in the areas of at retirement planning and pensions and divorce.

Last updated: 20 Nov 2015

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The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London EC3V 0RL.