What price (more) freedoms?

Reports indicate that the chancellor intends to allow pensioners (money purchase schemes only) the option of cashing in their pension annuity income in exchange for a lump sum from April 2016. This will be achieved by removing any additional tax charges on that transaction, and instead only taxing the payment at the individual’s marginal rate.

This action goes some way to remove a bias towards pre-retirees created by last year’s surprise pensions freedoms Budget announcement. The move is likely to be widely welcomed by savers, pensioners and the media, and as such it’s unlikely that the other political parties will seek to veto such a plan. So for the purposes of this article, let’s assume that the proposals will proceed regardless of the make-up and personalities in the next government.

So what’s not to like?

Firstly, is the perception that this will always be a good deal. The chancellor will be removing some tax from the equation, but reports suggest that marginal rates will still apply — and that could still make a substantial dent in the lump-sum payment (one that might well have been entirely avoided with regular annuity income).

By the same token, the rhetoric conveniently passes over an important consideration: the organisations that are prepared to exchange a lump sum for an annuity income are not required to do so by the government. They will only be prepared to make this exchange if they think that it is a good commercial decision. Or to put it another way, the value of the exchange is unlikely to favour the pensioner.

It follows that pensioners who have had little option but to lock into relatively poor rates in recent years now have the opportunity to compound that problem by swapping that income for a lump-sum payment, which may not favour them financially. This could make a bad situation worse for many.

This is clearly a concern that needs to be addressed, and at least one of the reports mentioned that the Financial Conduct Authority (FCA) will be tasked with introducing consumer guidance and protection around such issues. However, all the regulators are themselves under huge pressure from so much change in such a short period of time. Without significant extra resource, it’s unlikely that adequate consumer safeguards could be in place by April next year.

So while this will undoubtedly be a populist move by the chancellor, it again suggests that there may be a price to pay for full pension freedoms — at least for some savers.