Why you need better protection
Changes to pension rules have opened up a lot of welcome opportunities for those approaching retirement.
My clients are now planning for their retirement in different ways – although with change and additional choice does come an increased need for greater understanding.
Over recent months there has been a rise in non-advised drawdown. With more and more people accessing their pension savings without regulated advice, I’m backing calls to offer better protection to these consumers.
I’m not alone in writing to my MP lobbying for change. Other advice firms have also called on the government and the Financial Conduct Authority to ensure that people accessing their pensions without advice receive better protection.
Tax charges can significantly affect your pension planning
Savers can withdraw 25 per cent from their pensions tax free from age 55. After that they incur a tax charge set at their marginal rate.
While it’s fair for pension income to be taxed (considering savings receive tax relief upfront), it’s not ideal that consumers are incurring large tax bills when they withdraw as this can significantly impact their retirement plans.
In my experience, many consumers don’t understand the way their pension fund will be taxed, nor the restrictions imposed by the Treasury on future pension saving when they withdraw more than their tax-free cash.
I’d therefore back the call for providers to send consumers a statement explaining how much tax will be taken from their pension savings when they access it.
People who withdraw from their pension without advice may also be unaware that there are implications if they want to put more money into their pot after making a withdrawal. This is because the money purchase annual allowance kicks in.
To tackle this issue, I’d suggest that providers also explain the restrictions imposed on future tax relieved pension savings where more than the tax-free cash is withdrawn.
Another suggestion that has been mooted is a mandatory 30-day cooling off period for consumers looking to access their pensions without advice. Again, this seems to make sense to me.
Clients need to understand the implications of taking pension cash
My one concern with providers sending additional warnings to non-advised consumers is that people are already overwhelmed by the amount of paperwork and disclosure that they receive.
However, I believe that one of the main issues with pension freedoms to date is that many people simply don’t understand the implications of taking cash up front.
Any change that has a positive effect on improving a client’s understanding – and their financial position – has to be welcome.
If you want tailored advice on your retirement options, get in touch. We offer free consultations in Epsom, Surrey.