One key issue highlighted by LCP is the risk that people withdraw their full DC pension pot in order to access their 25% tax free cash, and then leave the rest to sit in a current account or cash ISA earning very little interest. Other savers may move into drawdown in order to access their 25% tax free cash and leave the balance in a post-retirement retail product which may have higher charges than the pension pot in which the money was previously held. In response, LCP called for a ‘decoupling’ of the taking of the 25% tax free cash and the need to move the other 75%, and the Select Committee has responded positively to this suggestion. One of their key recommendations is:
• Regulators should carry out a scoping exercise to establish the research and testing which could be undertaken on decoupling the 25% of a pension pot which is tax free from the rest of the pot and present their findings to the Committee.
LCP has welcomed this recommendation and called on the government to undertake the necessary research as a matter of urgency.
Laura Myers said: “For many savers the most attractive feature of saving in a pension is the ability to take 25% of the pension pot in the form of tax-free cash. The problem is that far too little attention is given to what happens to the other 75%. This can end up in a poor value drawdown product or, worse still, be fully withdrawn and sit in a current account or cash ISA with ultra low returns.
Decoupling taking tax free cash from accessing the rest of the pension pot would help savers make much better use of their hard-earned savings. I’m delighted to see that the Select Committee has responded positively to this suggestion and call on the Government to do the necessary work to see how this change could be implemented in practice. The key recommendations of this report need to be implemented without delay”.
Other recommendations supported by LCP include the call to rethink the Pensions Advice Allowance to make it more effective, as take-up levels are currently very low.
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