Royal London, the largest mutual life, pensions and investment company in the UK is concerned that many people taking advantage of the new pension freedoms are unknowingly potentially suffering financial detriment.
Recent independent research of a sample of 800 Royal London customers who had decided to take advantage of the new pension freedoms, found that 69% of the respondents had chosen to take all of their pension pot as a cash lump sum. This means that, in most cases, 75% of the cash sum those customers received was subject to an income tax charge.
Unsurprisingly, 16% of those surveyed said they intended to use the cash to clear their mortgage or other debts, which should improve their overall financial position. However the research also highlighted 32% of these customers intended to withdraw their money in order to place it all in an alternative savings or investment vehicle. Of those questioned, 23% intended to leave their money in cash within a bank, building society or cash ISA account which may pay a lower rate of return than their pension.
Fiona Tait, pension specialist at Royal London, commenting on the research findings said:
“We are extremely concerned that the findings from the research may reflect a wider industry trend. The research indicates that around a third of people who are withdrawing cash do not appreciate that their options could include a switch to a similar investment fund within their existing pension plan without paying the tax charge for full encashment or switch to an alternative provider which allows partial encashment. Customers aged over 55 would still have access to their savings whenever they need it and withdrawing money over time is likely to be much more tax efficient. Now we have these findings, Royal London is looking to update the questions we ask in order to check future customers understanding of the implications.”
Royal London found that the average size of pension pot being accessed was £15,500, which is in line with figures released by the ABI last month. The average size of fund being fully encashed was slightly lower at £14,100. Based on these figures the likely initial tax charge would be £3,347. This is because a cash lump sum is likely to be subject to emergency tax on payment, although it is possible to reclaim any overpayment at a later date.
Based on the research findings, Royal London is calling for the Financial Conduct Authority (FCA) to consider raising the prominence of this option in its future review of the rules and guidance. This would help a wider number of customers to understand the potential benefits of continuing to keep cash in a pension. It would also help to improve customer awareness of the consequences of cashing in their pension pot, particularly if they only wish to have the funds sitting on deposit.
The research also reviewed customer awareness of the second–line of defence questions and their implications, and it was very pleasing to see that across the board the response was very positive. Well over half, (56%) of those surveyed rated the second-line of defence call with Royal London, 10 out of 10 and 85% rated the call 8 or over. This would indicate that the second-line of defence is an effective way to highlight any issues, even if the customer still wishes to go ahead with the choice they’ve made.
Fiona Tait continued: “Royal London does want the pension freedoms to work, but not at the financial detriment of customers.
Where customers are looking to pay off debts or spend the money on a vital purchase, the tax charge may well be a price worth paying. However, if the intention is for the cash to just stay in a savings account, consumers are potentially paying a tax charge for no additional financial benefit. Having extra focus in the Retirement Risk Warnings framework would help to ensure that customers appreciate all the options they have within their existing pension. This is particularly important for those customers who are not willing or able to access financial advice.
Royal London has previously called for a review of the advice regime, particularly for Middle Britain customers, as it is often these savers that are left struggling to make these often complicated decisions on what they should do, without advice. However, the cost of delivering financial advice means that some advisers choose not to deal with clients holding small or medium-sized pensions funds as they cannot do this profitably. Hopefully the government’s recent announcement for a review of access to financial advice and the effectiveness of the current regulatory framework will enable access to regulated financial advice to be more readily available to all UK consumers, so pension freedom customers will be better equipped to make these important decisions.”
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