Employers and trustees have been urged by Standard Life to think twice before using new rules allowing pension savers to access their funds through a lump sum as the default option for schemes.
As part of the government's wide-ranging reforms to pensions, workplace scheme members aged 55 and over are set to be allowed to access ad hoc lumps sums from their pension pots without having to move into drawdown or buy an annuity.
A withdrawal alternative was set out in HM Revenue and Customs’ draft guidance on how pensions would be taxed when the changes, being implemented in the Pensions Bill, take effect from next April.
HMRC set out a new authorised lump sum payment, known as an uncrystallised funds pension lump sum (UFPLS), of which 25% is tax-free with the remaining 75% taxable as pension income at the individual's marginal rate of tax.
However Standard Life today said that this new route might not deliver the outcomes for individuals, particularly when it comes to accessing the tax-free lump sum.
'This latest uncrystallised funds pension lump sum option is not a panacea for all of [employees'] savings needs,' cautioned Alastair Black, the head of customer income solutions at Standard Life.
'Employers and trustees expose themselves to potential reputational and conduct risks. Employers, pension providers and advisers all have a responsibility to ensure employers get the right guidance and that risks are clearly identified when members withdraw funds from their pension pots.'
Standard Life identified several risks that could leave employers and trustees exposed if UFPLS were used as a default option.
These include that a perceived lack of choice may lead employees to assume a UFPLS is the best approach for them. There are also tax implications, as any withdrawal of funds using UFPLS will increase employee's income tax bill and could take them into a higher rate tax bracket.
Additionally, employees would see a reduction in their annual allowance if they are still working and want to access their fund though UFPLS. Standard Life noted that their annual allowance for contribution to their pension will reduce from £40,000 to £10,000.
Also, accessing funds through UFPLS is yet to be regulated by either the Financial Conduct Authority or the Pensions Regulator leaves employees unprotected, Standard Life warned.
