Doubts about pension savers making free withdrawals from their retirement funds
04 August 2014
Millions of pension savers will be prevented from taking cash freely from their retirement funds next April unless they pay hefty penalties that could slash their pots by more than 20%, according to reports.
The government has decided not to force schemes to offer its much-vaunted new pension freedoms for the over-55s, according to the Sunday Times. The report explained while thethe government would introduce a "permissive statutory override" there is nothing to force them to offer flexibility.
They will ring up their company only to be told the computer can't do it. Why would insurers want to facilitate this? Analysts told the paper many providers will refuse to invest in the new technology required to implement the changes.
The new regime, announced in the Budget in March, aims to remove the need for retirees to buy an annuity, which can offer poor value. Annuity sales have dropped 43.8% year on year as retirees wait for pension freedoms to begin in April 2015, according to latest research.
But many company pension schemes are likely to refuse to let savers take their money as they please, actuaries told the Sunday Times.
Similarly most big insurers contacted by the paper said they would struggle to offer the facility to many customers. The report said financial advisers expect a "backlash" from angry policyholders next April when their transfer requests are denied. Speaking to the Sunday Times, Steve Wilson, an adviser with Alan Steel Asset Management, said: "They will ring up their company only to be told the computer can't do it. Why would insurers want to facilitate this? Why would they invest millions in new computer systems [to cater for the new flexibility], only to watch the money walk away? Penalty charges of 4% for each year you go early are not untypical on some policies."
The report said the Treasury had acknowledged some pension savers might have to transfer to other arrangements to take advantage of the new freedoms. It said: "Some schemes would not be able to [manage pensions savings flexibly] due to inflexible legacy systems or the cost of providing facilities; therefore we don't believe it would be in the best interests of either the scheme or the member to force schemes to offer flexibility." The paper explained that many savers may have to pay exit charges and further costs for transferring into new flexible contracts, and it added some find it impossible to switch.