Forty per cent of pension providers are finding HMRC reporting around Uncrystallised Fund Pension Lump Sum (UFPLS) withdrawals the most significant new technical challenge following Freedom Day, according to a survey of providers carried out by retirement solutions provider Dunstan Thomas last month.
The main concerns associated with UFPLS are reporting correctly to HMRC in line with its Newsletter 68 published just after Freedom Day. One provider commented that HMRC was guilty of back-tracking. Others commented on the extreme complexity of HMRC Real-Time Information (RTI) reporting associated with UFPLS. This problem has been mitigated by a lower than anticipated demand for UFPLS in the first few weeks since 6th April.
UFPLS can be paid from uncrystallised money purchase funds as a lump sum. There is a 25% tax-free element and the balance is taxed at the member’s marginal rate of tax. Members (if their scheme allows) can take their entire money purchase pot as an UFPLS in one go, or take a series of smaller UFPLSs, each of which will have a 25% tax-free element. Media reports have likened this to using a pension as a bank account, although the reality is more complex.
More positively, four out of five providers (80%) believe that Pension Freedoms should be good for their business longer-term. Many believe that the changes make pensions generally much more attractive as a retirement saving vehicle. The abolition of the so-called ‘pensions death tax’ which also took effect on 6th April 2015, is seen as a major shot in the arm for the retirement market. So from now on retirees can bequest any funds left in their Defined Contribution (DC)-based pension pot, free of tax – providing the recipient keeps those funds in a DC pension. The fall of the annuity market will also mean that longer term, more funds will remain invested with providers for longer than before.
It was also agreed that the main benefit of Pension Freedoms was the resulting increased attention and understanding that it brought to the topic of retirement saving, according to two-thirds (67%) of providers. It has put retirement saving firmly on the public’s agenda again.
While a sixth (16.7%) said making illustrations more interactive – encouraging consumers to play with scenarios and educate themselves via new online tools – seemed the most positive outcome; and just over 8% thought that HM Treasury’s planned ‘Pension Passport’ initiative was the most positive outcome, helping consumers to understand the value of all potential sources of retirement income prior to making changes to maximise savings pots. The same percentage said that more effective blending of illustrations so that the annuity versus drawdown trade off can be better understood, would be the best outcome.
The complexity of adjusting to all the changes has meant that providers have had to focus on technical and administrative aspects of providing Pension Freedoms facilities to customers that demand it. However once all systems have been firmly in place, providers are clearly planning to focus more heavily on product innovation.
Some 13% of providers announced that they would be unveiling guidance, or other new advisory, services associated with their retirement savings products before the end of this year. However the vast majority (93%) said that there was still not enough clarity in definitions between simplified, focused and full advice to offer a new advice-based services without risking falling foul of the FCA or FOS. Perhaps one surprise from the poll is that only 7% of providers predicted that Pensions Freedoms would accelerate their firm’s D2C platform investment.
Natanje Holt, managing director, Dunstan Thomas, commented on the findings:
“It is clear that Pension Freedoms has created a huge administrative workload for providers which they will be still working through deep into the summer.
“However, there is already clearly pent-up demand for product and service innovation and the long-term prospects for the retirement market have improved significantly following the abolition of the pensions death tax and an end to the annuity-dominated at-retirement market. The findings also add weight to the old adage ‘there is no such thing as bad publicity’ as many more people are now learning more about how to maximise their retirement savings pots.”
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