There were all sorts of announcements about how pension freedom would change the face of retirement for everyone.
It would encourage people to save because the restrictions on how they could take their benefits would be lifted and they would be trusted to manage their money appropriately.
So how has it worked out over the last year from a practical perspective?
The biggest thing for me with pension freedom was the number of statements made by the government, implying that pensions would be as simple as a bank account and everyone would be able to access all the options.
To be fair, I don’t think they actually promised this, but it really came across that way and they did nothing to explain the issues that pension schemes might face in implementing the new freedoms.
My issue is the impact on some of the older schemes, those that are no longer taking on new business, and are really unable to offer drawdown, even with a year to implement it.
Drawdown or even uncrystallised funds pension lump sums (UFPLS) would mean dealing with not only partial crystallisations, crystallised benefits remaining in the scheme, but also benefit crystallisation events, running PAYE systems and also the possibility of dealing with members well beyond age 75.
Many of these things they have never had to deal with before and they aren’t that simple, we should know, we have offered all this for years in one form or another.
12 months later
Well, a year on and many schemes still can’t (not don’t) offer drawdown options but the government hasn’t made changes that would help members of these schemes be able to benefit from the flexibilities without having to transfer to a new scheme before retirement.
One of the simplest and easiest changes that could make a big difference is the ability to offer an open market option to drawdown.
You can still take your pension commencement lump sum (PCLS) from your current scheme and buy an annuity with the residual, but you can’t do the same and transfer the residual to drawdown.
This means that members are forced to transfer their funds to a new scheme or provider to use the freedoms, which could mean that they lose out on enhanced PCLS or even an early retirement age, should they be entitled.
In most cases the schemes that don’t offer the freedoms will be occupational schemes, so those most likely to be impacted by these types of benefits.
There are other issues that members are dealing with that could be rectified with simple changes to legislation.
Limits
Death benefit options are something that are still restricted in some schemes, if it is unable to offer drawdown at retirement, it isn’t going to be able to offer it to beneficiaries on death.
This could mean that someone being left a pension fund on death could be forced to take the whole fund out as a lump sum, possibly paying up to 45% tax, but more importantly bringing it into their own estate.
If a transfer was possible on death, at the point benefits are designated to drawdown, then this option would be available to everyone.
In addition, it would mean that transfers of pensions wouldn’t be so urgent. We are seeing an increasing number of enquiries due to death benefit restrictions in current schemes. This is something that could impact on a member at any point, so there isn’t necessarily time to wait to see if the scheme changes their options.
Pension freedom had many successes, so don’t think I am completely down on them.
Many pension savers who would have been forced into purchasing a small annuity have been able to access their funds in a more practical way, but we have to be realistic.
Even a year on there are still issues that need resolving because this was all done in such a rush and some of the practical issues have been missed.
Time should be taken to re-evaluate what is and isn’t working rather than just inventing something new again.
Claire Trott is director and head of pensions technical at Talbot and Muir
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