Morrison Blog: Questions over choice and freedom in pensions

In this brave new world of pension freedoms, people will have far more choice regarding what they want to do with their pension funds. As an industry our job is to make sure that the implications of making those choices are fully understood. In this light I was interested to read a headline this week reporting the FCA as saying that income drawdown is "unlikely to be suitable for pension pots under £50,000". The discussion continued to say that "there is no reason why over time flexible access products need to be poor value for money or to represent a high element of risk – it is about people understanding what they are getting into". In this context how do you define value for money? Is it just cost or does it also take into account achieving the client's goals – maximising utility! {desktop}{/desktop}{mobile}{/mobile} In a nutshell, drawdown exposes a pension fund to investment risk and possibly extra investment costs and if you want no risk then an annuity is the answer. An annuity might not be efficient for such a small amount of money – particularly with the prevailing low rates and so drawdown might be an alternative. And so we continue to go round. I would suggest that many with funds of less than £50,000 (in fact perhaps up to £70,000) are likely to want to 'encase' their pension funds and in order to do that they will need a product offering something like what we as an industry have termed 'income drawdown'. Even then there are two options - should it be by Flexi Access Drawdown or by taking regular uncrystallised funds pension lump sums? All this choice and they haven't even started to take their money out yet. Oh, and let's not forget that some providers (legacy books) might well not offer such facilities but instead force a transfer to someone who does. Their contractual terms might mean extra charges for early encashment on transfer, and some might also risk losing guaranteed annuity rates. The second part of the FCA comment about people understanding what they are getting into is perhaps more important, and is where we should spend more of our time. Will there be at least some process such as ... · What income would an annuity provide? · Should I take funds out and spend them? · If I do, what tax will I pay? · If I do not need the money all at once, will there be less tax to pay if I take it over several tax years? · By leaving it in a product for a number of years, will I still save money on tax or will product charge outweigh the savings? Or will people simply take their money out – just because they can?

Morrison Blog: Questions over choice and freedom in pensions

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