When pension freedom became a fiasco

Unhelpful insurers, baffling rules, rip-off charges. Getting your cash has too often been a battle . . . but help is at hand

GEORGE OSBORNE’S pensions revolution was supposed to be a landmark change in the way we take our retirement income for ever. Everyone was meant to have the chance to access their pension pot as they wanted. They could take the whole pot as cash, or keep it invested and make regular withdrawals — like a bank account. But the reforms plunged into chaos, forcing regulators to change the rules. Here is what happened and what you can do now.

HOW FREEDOM DAY TRAPPED SAVERS

On April 6 this year, pensioners were poised to access their hard-earned cash.

But Money Mail was soon bombarded with letters from readers complaining of heavyhanded treatment by pension providers who had blocked their requests for cash.

Many were told they couldn’t have their savings unless they first saw a financial adviser, which can cost up to £5,000 on complex retirement matters. Justin Modray, founder of website Candid Money, says: ‘These firms were convinced that if you ran out of money and were left impoverished for your remaining years, you’ll accuse them of negligence. So in many cases, they won’t give you your cash.’

readers also called companies to account for dirty tricks such as charging sky-high fees for withdrawals.

it had been assumed that most savers would be able to take their pension out cheaply. But recently published figures show that more than 2.2 million savers will be hit with pension exit f ees — f our times previous estimates — when they attempt to use the new pension freedoms.

Figures released by the City watchdog the Financial Conduct Authority show that one in ten savers will be charged for accessing their funds.

More than 870,000 of these savers will face a penalty of at least £1,000 for accessing their fund, while 62,000 face extreme charges of 40 pc or more if they access their retirement pot.

Some insurers were also found to be dragging their f eet, delaying payments by up to 90 days.

Another sticking point has been for savers with pensions that come with a built-in income guarantee if they use the money to buy an annuity. ( Such guarantees were routinely included in pensions set up during the 1980s and 1990s.)

When savers have tried to convert this to a scheme which allows them to access their cash, they are often turned away. But what many of these people haven’t realised i s that t hese i ncome guarantees are incredibly valuable and should never be given up lightly.

WHY THE RULES MAY YET CHANGE

BECAUSE of all the changes and to stop the scandal growing, the city watchdog, the Financial Conduct Authority ( FCA), now plans to revamp its rules.

At the beginning of October, six months after pension freedoms came into force, the FCA published a number of proposals designed to promote more effective competition, secure consumer protection and ensure the market

works well. New requirements will help those who reach retirement to shop around and make sure they have enough information to make informed decisions about what to do with their savings.

The FCA has confirmed that next year it will publish a review looking at the type of pension that savers are being offered, the charges, and who can access them. It will also cover how consumers make a decision, depending on whether they have had financial advice or gone alone.

Tom McPhail, head of retirement policy at Hargreaves Lansdown, said: ‘ By putting shopping around at the heart of the retirement process, banning t he mailing of unsolicited application forms, and conducting behavioural trials on better communications, the FCA is bringing the retirement process into line with the pension freedoms.’

The regulator is also looking into the process of purchasing an annuity that can be done with or without advice.

Christopher Woolard, FCA director of strategy, says: ‘We will continue to monitor the market as it evolves, to ensure that firms are helping consumers get the best outcome in retirement.’

The Treasury has also showed signs of supporting moves to force unfair charges to be scrapped and providers to treat customers fairly. It launched an official inquiry into pension freedoms in the summer after the Chancellor promised to end rip-off fees and other barriers preventing hard-working people getting at their own money.

Tom McPhail says: ‘The Treasury is taking a close look to see whether there are grounds to intervene on investors’ behalf.

‘An exit penalty of more than £1,000 is hard to justify in the new world of pension freedoms.’

BEWARE THE TAX TRAP

THE system f or taking your pension has improved since the first freedoms were launched. Your first port of call is to speak to your pension provider or f i nancial adviser and get a valuation of your pot.

Find out i f you have any guarantees or other terms and conditions that may affect what you can do with your pension.

It is absolutely crucial that you know all the smallprint in your pension because you don’t want to miss out on a lucrative deal.

One of the major hurdles has been that all providers have different rules. And not every type of pension qualifies for the new rules.

Those with a Guaranteed Minimum Pension, an Additional Voluntary Contribution s cheme and a Final Salary scheme have all had particular problems in being able to cash in their pensions.

I f your provider doesn’t allow you to use your pension as you want, then all hope is not lost. But you may have to j ump through an extra hoop and first transfer to a different, more modern type of pension plan that allows you to have f ull access to your savings.

You can, of course, still turn your pension into an annuity, which provides an i ncome for life, as under the old rules. But if you don’t want to do this, then there are essentially two other options.

One is to take all or some of your nest egg, known in the industry as taking an ‘ uncrystallised funds pension lump sum’ (UFPLS).

You may incur charges and delays to the payout, depending on your pension provider.

Once you decide how much you want to withdraw, you need to look at the tax liability. Typically, you can take 25 pc of your pension savings tax-free. The remainder is taxed as income in the tax year that it is taken. It’s these tax charges that might catch out some people who don’t take any advice.

Many over- 55s are still working, which means a l ump s um withdrawal could push them into a higher tax bracket if they don’t plan ahead. If you can, i t may be worth considering spreading your withdrawals over several different tax years to ensure that you avoid this.

And be aware that HMRC may give you an emergency tax code that could result in you paying a higher r ate of t ax t han you otherwise would.

This can be reclaimed by applying for an ‘in year repayment’ from HM Revenue & Customs.

You can also ask for gradual refunds of the extra tax you have paid from your monthly income payments until you have a full refund.

The other alternative is to take flexible drawdown.

This is where you can keep your money invested, but take out a regular amount each year.

The first 25 pc of each payment will be tax-free, and the rest is taxed as normal income.

Before taking out any cash, it’s essential that you explore all the possibilities — perhaps with professional help.

Because if you take the wrong decision, i t could be a very expensive mistake.