Michelle Cracknell: How can employers predict employees’ behaviour around pension flexibilities?

With not long to go until the major pension reforms, employers and trustees must be trying to predict employees’ likely behaviour around these pension flexibilities.


At The Pensions Advisory Service (TPAS), call volumes have been high since the start of 2015, which includes a significant proportion of people asking about how the new reforms would work.

Based on our helpline, there is an indication that April may see people using the reforms to tidy up defined contribution (DC) pots. This may be an additional voluntary contribution (AVC) or stakeholder plan that they do not see as the main part of their retirement income. The new reforms are giving them the opportunity to cash it in, often with a specific purpose in mind.

Perhaps a more worrying trend is the high volumes of calls that we are receiving from people with defined benefit (DB) pots who are attracted by the freedom and choice. The safeguards put in by the government that require people with defined benefits valued at more than £30,000 to take regulated advice will hopefully ensure that people understand the full implications of their actions.

Those people calling us are gathering information together in order to make their choice. Of course, there are many other people who may have read the headlines and decided to act; not all of these people will necessarily understand that cashing in their pension is an irrevocable action and there is tax, possibly at a higher rate than their normal rate, that they will have to pay.

Some people give the reason that they want to invest their pension pot in an individual savings account (Isa) even though the same investment choices may be available in a pension fund, which is a more tax-efficient solution.

The other concern is that people will assume that the actual tax deducted at the time the fund is cashed in is correct. In fact, more tax may be due when an assessment is done at the end of the year.

A major challenge for schemes is the possible volumes of people asking to access their money in April. People do feel as if they have been waiting 12 months so may not be patient. Many schemes will require people to transfer to a personal pension before being able to access their pension pot and this could frustrate people.

The reforms did create a spark that people may become more positive about their pensions. The next few months will be challenging with processes, timescales and ensuring people understand the options.

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With schemes working together with Pension Wise, we hope that people will have the opportunity to make informed decisions.

Michelle Cracknell is chief executive of The Pensions Advisory Service