Pension freedom risks outlined at Birmingham event

NEW ‘pension freedom’ rules which come into effect on April 6 will provide greater flexibility to pensioners but there are risks linked to the changes, a Birmingham event heard.

A business audience at the event – staged by TheBusinessDesk.com and Cannock-based pension specialist Wealth Design at Opus Restaurant – heard that there are tax implications linked to the additional flexibility.

Much has been written about the death of the annuity – as pensioners will no longer have to buy one – and whether the ‘Lamborghini factor’ will see many pension plan holders ‘blow the lot’, but Wealth Design director David Phillips told the audience that the changes go a lot deeper than those headlines.

He said: “This turns the whole market upside down.

“The financial press has not picked up on the changes that are going on. There are big changes around aspects of death benefits, for example.”

Phillips said that people drawing money in excess of ‘cap drawdown’ could see their annual tax allowance drop from £40,000 to £10,000.

“The danger is people will sleepwalk into this,” he said.

“The first they will know is when they get a tax charge.”

Phillips said that providers are not ready for pension freedom and “people using their pension like a credit card”.

“It is incumbent on us as professionals to try and guide clients in the right direction,” he said.

Phillips also pointed out the rules of the game are changing in relation to the removal of the potential 55% tax charge on death in favour of benefits being tax-free (under age 75 years).

He suggests clients need to consider not utilising their pension fund, given the tax-free treatment outside the rules of inheritance tax, and using their ‘estate assets’  – ISAs, cash, bonds etc – as this could save tax being paid unnecessarily.

Alan Dark, an employment law specialist from Midlands law firm Shakespeares, told the audience that there are also implications for employers as a result of the pension freedom changes.

“Workers within smaller DC arrangements may dilute their cash and so may need to work longer to fund their retirement,” he said.

“And you can’t discriminate against employees because of age.

“Equally workers may cash out and request flexible working. Any worker who has been with the business for 26 weeks can do this.

“Employers need to look at the typical profile of people in their workforce and review their flexible arrangements.”