Calls are increasing for the Government to grant a cooling off period when a consumer accesses their pension pot without taking advice.
Stephen Lloyd, the Liberal Democrat Work and Pensions spokesman, said he was particularly concerned that people did not understand the tax implications of pension withdrawals, and that lump sum withdrawals were taxed as income, possibly drawing people into higher rate tax brackets. He has written to Secretary of State for Work and Pensions Esther McVey explaining his concerns.
Mr Lloyd said:
“The pensions freedoms have enabled many people across the country to better plan for their retirement, but the legislation was always intended to be a work in progress, the cold calling ban and this cooling off period are the next logical steps.”
Nationwide advisory firm LEBC had previously advocated a 30-day cooling off period.
In early July 2018, the Financial Conduct Authority (FCA) unveiled a series of new proposals regarding retirement income options, although these did not specifically address the issue of whether individuals were aware of the tax implications of withdrawals. The regulator did note however that 32% of those entering drawdown now do so without advice, whereas the equivalent figure prior to the introduction of the Government’s pension freedoms was just 5%. Drawdown is undoubtedly a complex area.
One of the other proposed new rules is for providers to be required to send ‘wake-up’ packs to every pension customer. The first such pack would be sent when the customer reaches age 50, and a similar pack should continue to be sent every five years until such time as they have fully accessed their retirement savings. These packs will include a one-page summary document – which will include:
- The individual’s contribution rate
- The fund value
- Whether guarantees or other special features apply to the plan
- A statement asking the individual to consider whether they are saving enough
- A statement about the availability of pensions guidance.
A series of relevant risk warnings will also be included in the wake up pack, and firms will not be permitted to send any marketing material alongside the pack.
The FCA is also taking steps to ensure consumers are better informed at the time they choose to access their pension pots. The ‘investment pathways’ proposals would require providers to set out three investment solutions that the customer could make use of upon entering drawdown. These pathways should include one solution for each of the following three strategies:
- Accessing the entire pension pot over a short period
- Using the pot to provide a regular retirement income
- Keeping the money invested, and maybe accessing it occasionally over time
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position