The day after "Pensions Freedom Day"
It is the 7th April following a long Easter bank holiday weekend, which included what was playfully dubbed as “Pensions Freedom Day”; 6th April.
From the office here in Manchester, with the window open, a call to silence and a strain of the ears we are still yet to hear the growling undertones of any V8 Lamborghini engines being road tested by over-55s with a hole burning in their pockets.
Yesterday; new pension legislation came into force that allows those aged 55 and over to access their Defined Contribution (DC) pension pots. Those fitting the age criteria can access their DC pension savings by either taking a lump sum of money; 25% of which can be taken tax free. In addition to this you can also treat your pension as a bank account and access it as and when you need to; again with 25% of any transaction being taken tax free.
Those over-55 are no longer required to buy an annuity which purchases them an income for life, and those that have bought an annuity can exchange it for a cash sum.
Or, you could just leave it where it is.
As you can imagine, the pensions industry is in somewhat of a panic with the claims that pension providers and the government’s free “Pension Wise” service are grossly unprepared for the new legislation. It is reported that only around 300 new advisers have been recruited and trained to deal with the promised, free half hour 1-2-1 sessions that the 2.1million over-55s have been promised to help them to decide if cashing in on their pension is the right move for them.
In addition to this, there has also been an increase in the number of cold callers and scam artists trying to profit from the new legislation and get a share of the £350billion now available to pensioners.
There is also talk that there will be a “triple tax hit” if you were to withdraw your pension pot early. Firstly, while the first 25% of any withdrawal is tax free, the remaining 75% will be taxable according to income tax bands of 20%, 40% and 45% if the withdrawal combined with your income reaches the banding. The next hit of tax will come from whatever you decide to spend the money on and the third hit will come from the removal of the “tax-protected” status.
Pension Minister Steve Webb has explained regrets of his initial comments which suggested that over-55s will go on a savings fuelled spree and buy a Lamborghini amongst other luxury items; a holiday or buy-to-let housing. Webb explained that the 6th April was the “Starting Gun” to the pension legislation, not the deadline and that if you are not in a position to make a decision about your money, then don’t make any decisions at all.
There are fears that this new legislation could spark a “Buy-to-let bubble” making it increasingly more difficult for first time buyers to get onto the property ladder and that a lot of money will be spent on holidays. But, with the lack of vivacious V8 roar; there was equally an absence of round-the-block queues outside the local estate agents this morning.
It has been suggested that the sensibility of those that have spent their career paying into DC pension schemes does not suddenly turn into a lust for luxury as soon as the rules change and they are allowed to access their pension. While the romanticism of purchasing a sports car and an excursion to the French Riviera seems captivating, the early indications are that people are allowing their mind to rule their heart and ensure correct preparedness for life after work (and salary).
This pension reform, one of the biggest in the last century allows greater freedom to those with pensions. In another large pensions shakeup in recent times; auto enrolment; the aim is to enrol millions of workers in to qualifying pension schemes.
This legislation came into effect in 2012 and now we are entering the period of “Staging” (the date of which an employer has to have auto enrolled their employees by) of SMEs which means even more strain on employers and pension providers. The difficulty comes when ensuring that enough advice is being given to both over-55s wanting to withdraw their pension, and those between 22 and Stage Pension Age (SPA) that want to be enrolled into a scheme.
To fully prepare yourself for auto enrolment based questions, it is extremely important that you gain as much knowledge as you can. IRIS have a number of different training seminars that you can attend in person or from the comfort of your desk via online webinar to help you to better understand auto enrolment.
Ultimately, due to the volume of calls and requests for information that pension providers and Pension Wise are going to recieve (Scottish Widows say that they expect to recieve two year’s worth of enquiries in the next three months), employees will turn to their employer for advice and guidance on auto enrolment.