Complications
When, in the 2016 Autumn Statement, the chancellor announced he would reduce the £4,000 money purchase annual allowance (MPAA) for pensions that have started to be drawn down, it came as a shock to the industry. The change is currently in limbo, but would appear to go against the spirit of offering retirees greater flexibility.
IFS Wealth & Pensions’ Mr Chan says: “I think in a way it contradicts pension freedoms. I do think [a limit] needs to be there, but a client who doesn’t go to an adviser risks triggering the MPAA and unknowingly limiting their future contributions, especially if they’re still paying into it with auto-enrolment.”
Appleton Gerrard’s Mr Ariyawansa dubs plans for the reduction “outrageous”, and argues: “The whole purpose of pension freedoms is that you can access the money whenever you want with a view of being independent. They’re encouraging people to pay for their future and not rely on the state, and now they’re penalising people and saying: well actually, we won’t let you retire in a comfortable way.”
DB to DC transfers
One of the biggest challenges for the pensions industry – the significant increase in the number of defined benefit (DB) to defined contribution (DC) transfers – has also created problems.
With DB scheme members unable to access the freedoms without transferring to a DC, and transfer values soaring, a mass of switching enquiries has ensued. This has left regulators, the government, providers and advisers scrambling to ensure consumers are treated in a sensible and even-handed way.
Following the FCA’s April announcement of plans to consult on DB transfer advice guidance “in due course”, Aegon chief executive Adrian Grace recently called for further clarity for advisers. Aegon’s Mr Cameron adds: “The FCA could really deliver a big value-add by revisiting its advice and consulting on how this should be done in a post-pension freedoms world, so advisers have confidence that we’ve got an agreed approach for engaging those customers and meet[ing] the huge increase in demand for advice in this market.”
He adds that the traditional approach to transfer value analysis, for example considering how much a scheme’s transfer value would need to grow each year to be able to replicate the amount given up by buying an annuity at a scheme pension age, needs to be adapted for pension freedoms.
“I think they need to carry on and begin to build in how much value the individual places on being able to use pension freedoms – perhaps taking money earlier, taking a bigger lump sum or wanting better death benefits associated once they’ve transferred. There are all these other factors that need to be a part of the advice process,” he says.
