Pension providers may be swamped with demands for money as George Osborne’s savings ‘revolution’ comes into effect
Ministers have warned people who will be 55 or over this spring to delay exercising new rights to cash in their pension pots in April, amid rising fears that the industry will not be able to cope and that insufficient advice systems are in place.
The cautionary message, issued by pensions minister Steve Webb, reflects growing nervousness in government that the pensions revolution of the chancellor, George Osborne – which he said would give people the right to “choose what they do with their money” from April – could turn into a fiasco in the runup to the 7 May general election.
Leading pension providers and industry experts, although supporting the government’s objective of giving people greater access to their pensions savings, told the Observer that pensions companies face being swamped by demands for cash after 6 April, before the industry is ready, or customer advice networks have been established.
Tom McPhail, head of pensions research at leading pensions company Hargreaves Lansdown, said the government had tried to force through the changes at “reckless” speed in what seemed a clear attempt to make people feel richer before election day.
“There is widespread support for these reforms, both from the pensions industry and from investors,” McPhail said. “The problem is the reckless pace with which the changes are being introduced.
“There’s a pretty transparent political agenda to unlock billions of pounds of pension money just a month before the general election. The policy may be a good idea, but the timing is unashamedly intended to buy votes.” He added: “With such radical and profound reforms as these, under normal circumstances you’d expect to take at least another year before implementing them, in order to make sure all the various players involved were ready. Unfortunately the industry does not have that luxury and as a result many pension providers will be woefully unprepared on 6 April.”
Last year Osborne announced that from 6 April this year people would be able to cash in their pension pots under a far more favourable tax regime than is currently in place. Under the plans, people approaching retirement would also be freed from having to buy an annuity and would be able, as a result, to hand on money to their families when they die.
Under the legislation now passing through parliament, people aged 55 and over will be able from April to take lump sums from their private pension pots. A quarter of the money taken at any one time will be tax-free, with the rest being taxed at their marginal rate of tax. The current rules act as a disincentive for people to cash in pots, as the tax penalties are far more punitive.
Osborne said last October that from this April people would “be able to access as much or as little of their defined contribution as they want and pass on their hard-earned pensions to their families tax free.”
But last week Liberal Democrat Webb told journalists that people should not rush to make decisions in April. “There is nothing magical about 6 April. I think there is a case for waiting and seeing if you can. You don’t have to rush this. Wait and see what products become available,” he said. “If you are in a position not to make a decision [about your money] on 6 April, I suggest you don’t.”
Toby Strauss, chief executive at Scottish Widows, said his company was working hard to allow people to draw down money from their pension funds and to enable tax-free cash to be taken. Scottish Widows has recruited 400 extra people to help deal with customer enquiries.
But he cautioned: “I think there is a risk that we’ll be swamped come 6 April. We are working on the assumption that volumes will be three times the normal level – but obviously they could be significantly higher. If we can handle the volumes of people asking for cash we will try to manage those conversations; if we can’t manage the volumes, we will use online as an ‘overflow’ for those people.”
Labour is tabling a series of amendments to pensions legislation now passing through parliament in an attempt to ensure better advice for the public and that every effort is made to prevent another mis-selling scandal. This week it will seek to highlight the dangers of what it sees as inadequate safeguards and advice for consumers.
Rachel Reeves, the shadow work and pensions secretary, said: “The government’s failure to put in place adequate safeguards risks chaos for savers in April. Hundreds of thousands of people are in danger of taking one of the most important decisions of their lives without access to expert financial advice and guidance. Ministers must put in place the extra protections Labour is proposing this week to ensure no one misses out on guidance about how to spend or invest their pension savings.”
John Lawson, head of policy at Aviva, said: “The real danger from April is that people will overspend too quickly. Freedom and choice will be a real boost for retailers. If I was selling cars or conservatories, I would be thinking ‘fantastic’.”
One of Aviva’s concerns is that people will underestimate their potential longevity and will run out of money before they die. “In Australia, two-thirds of people spend their retirement savings too quickly,” Lawson said.
“That is why it is essential that people understand longevity before they make plans about how to spend their money. One-third of the population lives longer than 90, and for people who are wealthy and in good health they should be planning to age 95.”
McPhail said that for some pension companies the consequences of a sudden rush of demands for cash could be “catastrophic”.
“This is not so much about developing new products. Most of the problems will come from companies which have no experience at doing this kind of work for their customers. This means they will have to build new administration systems and compliance processes, train staff, design and print new forms and brochures. We know from our own years of dealing directly with pension investors who want to draw cash from their pension pot that you can’t build this kind of experience overnight. From talking to others in the pensions industry, we know that many companies are simply not going to be ready.
“We know that several hundred thousand investors are likely to want to access their pension pots in the first weeks and months after the start of the new tax year. For some pension providers the consequences are likely to be catastrophic. Anyone who is planning on spending that pension cash would be well advised to contact their pension company now and have a frank conversation with them about how exactly they will be making the required payments.”
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