Judging Sensible Pension Access
I have some sympathy with the view expressed by Association of British Insurer director general Huw Evans when he told a recent committee of MPs that referring to pensions as bank accounts is 'the most irresponsible' thing people can do when talking about the recent reforms.
As he explained to the Work and Pensions Select Committee, you cannot incur a tax liability when you withdraw money from a bank account. Furthermore, while money is withdrawn from and paid into bank accounts with complete flexibility, untoward recycling of pension contributions and withdrawals will attract the attention of HMRC.
But it is no surprise that the press and therefore the public have taken to the concept of pension as a bank account, not least given Chancellor George Osborne’s decision to describe the new freedoms as allowing people to access ‘as much or as little of their savings as they wish’.
Osborne certainly meant for voters aged over 55 to understand they can access their pension for discretionary purchases such as holidays, home improvements and Lamborghinis or, more realistically, family cars. In fact all the government rhetoric right up to the date of May’s general election was from the perspective that nothing should stand between savers and their pension cash.
Since then the story has changed, with consumers finding that getting access to their pension cash has not proved as easy as they might have hoped. Politicians have responded to this pressure by passing the blame onto the pensions industry, different parts of which have responded in different ways, with some providers interpreting the rules around access with or without financial advice in completely different ways.
What we are left with is a complete mess with financial advisers stuck bang in the middle, where consumers are being forced to seek out financial advice they don’t want to pay for, so they can ignore it to access their cash.
And certain corners of the financial services industry are pouring fuel on the fire of the pension as bank account, well aware that there are few things consumers like more than easy access to cash. Take the Sipp providers pledging to offer ATM cards linked to their pension wrappers. Yes it might seem like a gimmick to give a bank card with your pension, but some consumers will like the idea, however much it ends up adding to the AMC of the product that offers this dubious feature.
The problem for advisers is that pensions are now like bank accounts, except they are bank accounts with very powerful tax relief features. Judging where sensible use of the Chancellor’s new freedoms stops and dodgy recycling starts is going to be a delicate process.