Pension deregulation arrives, but cashing in the pot in one go is not quite as simple as you think

There will be some hefty tax charges if you try to take all your money out - then there’s the dilemma of whether an annuity still might actually make sense

There aren’t many “where-were-you-when-they-shot-Kennedy?” moments in personal finance, but I vividly recall listening to the Chancellor’s words on 19 March last year, when he changed my world in his Budget.

When he said that “no one will have to buy an annuity” and proposed allowing people to take money out of their pension funds tax-free, I knew it was a revolutionary move, a big story that could mean, perhaps, a lot to me personally.

In fact, the real architect of this reform, I believe, was Steve Webb, the Liberal Democrats’ pensions minister, and it is him we have to thank for the new “pensions freedoms”.

He swiftly moved to reassure the country that those who have amassed some savings for their retirement were unlikely to go out and “blow it on a Lamborghini” (though the thought did cross my mind, briefly).

Then, as the weeks and months rolled on, the reality began to crystallise. There would, in fact, be some quite hefty tax charges if you try to take all your money out, especially if you are still earning. Then there’s the dilemma of whether an annuity still might actually make sense.

I still don’t understand what proportions and over what period that “draw down” is possible. More worrying were the rumours about swindlers taking an early opportunity to get their hands on people’s money – either with a view to outright theft, or to provide a bogus “free assessment” that would result in massive charges, kick-backs for them, and poor performance for the victim.

For all its merits, this round of pension deregulation does have the capacity to become “the next great mis-selling scandal”, just as it did 25 years ago when so many people were persuaded to move out of a proper pension based on their length of service in their job, into some rubbish cash-based “money purchase” scheme, loaded up with charges and penalties.

These victims were left to reach old age in poverty, to the eternal shame of the ministers concerned and the pensions industry that allowed it to happen. With good reason, public faith in pensions has never recovered.

After the pensions revolution was proclaimed, it was not long before I received a cold call, from a company I had never heard of, but which sounded plausibly reputable, claiming to be offering “free advice”, which would involve them couriering round a consent form that I would have to sign there and then, on the doorstep. After that, no doubt, the pressure selling would begin. Fortunately I was impervious to their blandishments, but I fear for those who may not be.

There are some 13 million defined contribution pension savers – as opposed to traditional occupational “defined benefit” pension savers – and a small but significant proportion of them may be naïve or confused enough to be taken in by a stranger calling from a boiler room. When they are finally drained of their savings, they will be thrown back on the state. They will also, adding insult to injury,  be subject to another round of scamming calls from firms claiming that they will win you compensation for mis-selling.

I wonder what Mr Osborne and Mr Webb will say about all that in a few years’ time. Certainly the promised face-to-face guidance hasn’t materialised for many, and the very complexity of the rules means getting proper advice may be costly anyhow. And that is before we consider the case of those who have already taken out an annuity and now want to cash it in.

One choice that will face many is whether they should put their money into a buy-to-let property. Personally – and this is NOT advice – I would have thought the time to do that would have been a few years ago, when house prices were falling.

It might still make sense for some in some circumstances, who knows, but the baleful effect on first-time buyers, already almost priced out of the market, and the stability of the housing market is also something that the Government and the Bank of England (via its Financial Policy Committee) might usefully take more account of. The rapid release of billions of pounds out of pension funds being pumped into the property market threatens to create another bubble. 

What am I going to do? Well, my pension savings are not so vast (Ed Miliband’s war on the million-pound pension pot won’t trouble me overmuch) and I am not quite of the age – 55 – where the decision becomes “live”, so I can continue to weigh up the options. Even if I were that age, I would be in no hurry to make any decisions.

As it happens, I’ve never really liked Lamborghinis anyway, but not as much as I disliked and distrusted the pensions annuity regime. On balance, I am looking forward to the choices I will be able to, rather gingerly, make.

New freedoms: how they work

What are the new pension freedoms?

From today anyone aged 55 or over will be allowed to take the cash out of their pension pot and do what they like with it. Or, to be strictly accurate, anyone with a defined benefit pension scheme may have the opportunity to get their cash if their pension provider has set up the necessary procedures.

Doesn’t my pension provider have to give me my money?

Not all pension companies, and not all pension schemes, will offer all the freedoms. Some may offer some options, while others may not offer any of the new flexibility to take your cash out. If that’s the case and you really want to get your cash, you may need to transfer your retirement savings to another company to access your pot. But you should be aware that if you do this there could be penalties, which would eat into your savings.

Hmm, doesn’t sound as easy as I expected.

It’s not. The City Watchdog is aware of the problems and admitted that, faced with “the most fundamental changes to pension policy we have seen in over a generation”, it will be forced to spend much of the next few months closely examining pension companies and how they deal with their customers. Financial Conduct Authority boss Martin Wheatley said: “We will be looking at how the market is working and how the industry is adapting to this change, and what it means for consumers.”

If I can get my cash, can I do whatever I like with it?

That’s the theory. But if you splash out on a holiday or fancy car, you could live to regret it.

But why shouldn’t I spend my money how I want?

Remind yourself why you built up the money in the first place. A pension is simply a planned savings scheme with a clearly defined aim: to ensure you have enough cash to last through your older years. If you take the cash and blow it, you won’t then have cash available to buy yourself an income for life. That could leave you living off the relatively meagre state pension. There are also massive tax implications.

Isn’t my pension cash tax-free?

Only a quarter of it, the rest attracts tax at your normal rate. That’s 40 per cent if you’re a higher rate taxpayer but even if you’re not, the money you draw will be added to your income and could very well push you into the 40 per cent tax bracket. There’s also the risk of being charged emergency tax on your cash, which could leave with the problem of trying to reclaim it from HMRC.

So what are my options?

The much-maligned annuities are becoming more attractive and could well be a good solution for you, providing as they do a guaranteed income for life. The unfair issue that an annuity died with the person is changing, and the annuities themselves are become more flexible – allowing you to alter them to meet your changing circumstances. You could avoid paying tax on your pension altogether by delaying taking it out until you stop working and then staging withdrawals so that you don’t fall foul of income tax demands.

It sounds very complicated.

It is, and that’s why it’s important not to rush a decision. Do so and you could end up making a costly mistake. The Pensions Minister Steve Webb pointed out last week that today is not a deadline, it’s just the start of the new freedoms. Delaying a decision until the autumn will give you more time to consider your options and, by then, there are likely to be many more options offered by different pension firms. However don’t think you have to take the retirement income solution offered by your own pension company. You could potentially do much better by switching companies.

What if I want advice now?

Go to the Government’s PensionWise service. Visit pensionwise.gov.uk or call 030 0330 1001, or contact Citizens Advice to arrange a face-to-face session.

What shouldn’t I do?

Fall victim to a pension scammer. Jamie Jenkins of Standard Life warns: “The biggest risk in the new pension freedoms is scammers. The worst thing that could happen to anyone under the new freedoms is that they take all their money out and hand it to someone who is scamming them.”

How can you spot the scammers?

They usually cold-call prospective victims. So if you get an unexpected call offering help with unlocking your pension, put the phone down!

SIMON READ

Personal Finance Editor

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