Locked Out of Pensions Freedom or Pay More For The Privilege.
As I have mentioned in a previous note, we are starting to hear Pension Providers are redeveloping their propositions ready for April next year. This could lock people out of the Freedom of Choice! In the cold light of day it is a business decision on behalf of the providers, and one which is probably required if the providers are still to be in business in the longer term. The financial strength and profitability of a provider is a pre-requisite if they are to be a long term home for peoples’ pensions. Anyone would clearly prefer to have their pension with a company that is financially strong, had reasonable charges, good levels of service, decent investment performance and a range of investment choices to meet their needs. If these components are not there it would be a great concern. We have seen pension products become inexpensive over a number of years with the advent of Stakeholder pensions and competition, and we have seen a lot more transparency since the advent of the retail distribution review which banned commission and made products far cleaner.
The problem for providers now is how they make any profit in the new world of Pensions Freedom. Only 6 months ago, anyone entering drawdown had a limit set on the income they could draw. This meant until they purchased an annuity or died, the providers had an expectation of how long they would have the money for and set a charging structure accordingly, spread over the expected term of the product. The initial costs of setting up the plans were gradually recouped over the expected term generally with an all-encompassing charge of 1%-1.5% a year for the life of the plan.
The only exception to this was SIPPs which had fixed monetary fees which could be very penal on smaller funds. Now, as the providers have no real idea of how long the fund may stay with them, they clearly have to rethink their model and charges. The worrying point is the suggestion that the minimum fund they will accept into these arrangements is set to increase. Equally we are hearing there is likely to be an increase in the charges of these products. Now people can take as much as they want (subject to tax) after April 2015, there is the risk an average fund could be extinguished over a few years. Larger funds may last longer as many people may restrict income to keep in the basic rate tax band. Equally some funds may be left in the pension due to the preferential death benefit position. However, pension companies are in the risk business. They will not want to risk losing money on smaller funds which could be extinguished very quickly. This is the reason why we are likely to see a substantial increase in the minimum amount a provider will accept into a flexible pension product, and equally we are likely to see an increase in charges to cover short life plans. This could leave some people locked out of the flexible market, unless they are willing to pay much higher fixed fees. These people could be caught between a rock and a hard place. Pay higher fees to get into a plan which gives them what they need and control income in a tax efficient manner, or pay a greater amount of tax by taking all the pension on one go as they do not have enough to meet the new product criteria’s and therefore are forced to a full commutation.
There is a window of opportunity for those with modest funds to get into current contracts over the next few months with lower minimum criteria and cost effective charges before the new ones are launched. Action needs to be taken now to stand a chance of benefitting from this. We do not know how long this will last and when providers will pull the current offerings. It could be viewed as a Buy now whilst stocks last Christmas sale!
If you think this affects you, or you have any concerns, as always please get in touch to discuss. 08001032500 or 01606839720 By taking action now, individuals will be able to have all the same flexibility they could have in April 2015 so are not causing any detriment and we can only see positives. We are happy to discuss the impacts on an individual basis, but the overriding issue is one we feel is worthwhile raising.