Savers expecting to access their pension funds like a bank account when radical reforms come into force next year face disappointment as leading providers warn they are unlikely to offer withdrawal facilities immediately.
As part of changes due to come into effect in April, people aged 55 and over will be given new freedom to take their entire defined contribution pension pot as a cash lump sum.
The government has suggested that lifting restrictions on access to pensions could allow customers in future to draw on their pension as if it were a bank account.
But pension industry executives giving evidence to MPs scrutinising the government’s plans have poured cold water on the suggestion that debit cards for pension bank accounts will be available.
Legal & General, one of the country’s leading pension providers, bluntly told MPs that it “was not a bank”.
“We will not be providing a cashpoint card or a hole in the wall,” said Adrian Boulding, pensions strategy director with L&G.
“A pension scheme is not like a bank account. If you want to take money out, even under the new flexibilities, you have a raft of HM Revenue & Customs paperwork to go through, and it will take at least a couple of weeks to get the money out.”
The April changes will allow all savers to cash in their pension, either all in one go or via a series of ad hoc withdrawals. A quarter of each withdrawal will be tax free and the rest subject to tax at the saver’s marginal rate.
However, keeping the money in a pension has tax advantages because investment growth and interest is tax free, unlike an ordinary savings or current account.
Taking money from the new pension “bank account” arrangement, known as Uncrystallised Funds Pension Lump Sum, will also trigger a reduction in the saver’s annual pensions savings allowance from £40,000 to £10,000.
“It is not like taking money out of a bank account,” said Jon Allen, a policy adviser on tax and pensions with the Association of British Insurers, the trade body for the pensions industry.
“It is taxed money and there are tax traps that people will trip over. If they take a large amount of money out of their pot, they could find themselves charged at the higher rate even if they have never paid higher rate tax in their life before.”
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