10th December 2010
Michelle Mitchell from Age UK says that while many pensioners will no doubt welcome the greater control they will have over their pension fund and retirement income at the age of 75, without being properly informed they could make decisions that severely damage their financial security.
Mitchell says: "Many people, particularly the relatively wealthy, will welcome proposals to liberalise the way in which they draw their pension savings. However we are extremely concerned about the very significant costs and risks involved with the government's proposals to allow more people to draw income directly from their funds."
The risks she has identified include the mis-selling of complex and expensive alternative products, damage to the annuity market, and "real hardship for many pensioners in the future if the value of their investments falls or they live longer than expected".
Under the new proposals which are set to come into force on 6 April 2011, pension holders will have greater control over their pension fund and retirement income at the age of 75.
Taking away the age ceiling for most lump sums, and removing the need to buy an annuity from a Direct Contribution scheme, will create greater flexibility for pension holders.
But, experts say that one of the less favourable changes is the decision to increase to 55% the tax rate on all lump sum death benefits, other than for those who die without taking a pension before age 75.
Dr Ros Altmann director general of The Saga Group says she believes the proposals are "grossly unfair".
"A 55% tax relief recovery charge is penal for those who only received basic rate tax relief on their pension savings. It is only 'appropriate' for higher rate taxpayers, but these are the minority of citizens. Top rate tax relief gives £2 for every £3 people invest in a pension, which is a 66% benefit. However, those on basic rate relief get only 20p for every 80p they invest, a 25% uplift. Thus a 55% recovery charge is unfair."
Mitchell adds: "If the proposals go ahead, the government and regulators must ensure that anybody considering new ways of drawing their pension is fully informed of the potential risks and expense."
Pension planning is clearly at the top of many people's agenda at the moment. Unbiased.co.uk says consumers seeking re-mortgage advice increased by 4% almost matching the top search on unbiased.co.uk's ‘find a mortgage adviser' service, first-time buying, which dropped slightly to 36%
Jason Witcombe, a chartered financial planner with Evolve says: "What everyone needs to remember is that retirement planning is not just about pensions. Paying off your mortgage, saving into ISAs and making other investments are just as valid ways of planning for retirement. Downsizing the property you live in may also be a key consideration for some.
"Where people take this multifaceted approach to building a retirement "pot" it is then easier for them to draw their pension income in a very flexible way.
"The key message is that planning for retirement and the process of retirement itself don't need to be one dimensional and the more people can understand this in advance the better prepared they will be."