This article was originally commissioned for the August edition of the Actuarial Post.
Power to the people! This, slightly paraphrased, ringing cry from Chancellor George Osborne at the budget is still reverberating through the world of pensions and the latest tremor comes from the Treasury. This is the news that a fourth way has been added to draw you pension down, alongside the existing approaches of Income Drawdown, Lifetime Annuity and Scheme Pension.
The new method is called the UFPLS – that’s Unsecured Fund Pension Lump Sum to the rest of us. The UFPLS allows people to draw down a lump sum from their pension without crystallising the whole pot. They can have 25% of the lump sum tax free whilst the remainder will be taxed at the individual’s marginal rate. In the meantime, the remainder of their fund can continue to grow without its uncrystallised status being affected by the withdrawal.
The UFPLS approach allows pension schemes to facilitate people who want to access their pension funds under the new system without the schemes having to offer full income drawdown style products. As such, it is likely to be much in demand by those who wish to access a lump sum, for debt repayment for example, but who fully intend to continue working. It’s like an ability to release equity except it’s from your pension fund rather than from your house.
UFPLS is in line with giving more power to people to control their money and already many pension companies are moving to provide far greater access directly to the consumer so that the maximum amount of control can be given to individuals at the lowest possible cost. This will allow them to access their pension to take out a lump sum whenever it suits them, providing they are over 55 of course. It all sounds great and trendy, and is very popular in the financial pages of the newspapers but as with all benefits, it doesn’t come without risks.
Allowing people to control their own funds, including the investment and the depletion, is moving the pension approach closer to the investment side. This is a relatively straightforward technological approach as newer Direct to Consumer (D2C) technologies can be adopted to facilitate secure access by individuals. This can provide consumers with the means to control their finances and is also cost-effective for the company. It is a technique that was inconceivable even a decade ago, both from the point of view of the companies technology base and the ability and confidence of individuals to use the Internet to transact business. However, modern technology has enabled consumers to take far more control over the buying service; one only has to witness the changes in the air-travel market to realise how far technology has put control into the hands of the individuals and taken it away from middle-men such as travel agents and airline booking centres.
There are risks for the companies, though. As the systems will allow people to make things happen, they will also enable people to screw things up royally. Incorrect investments, badly timed withdrawals, poor understanding of the tax implications and just general mistakes; all of these are potential land-mines in the path of individuals trying to self-arrange a comfortable retirement; a path they are less likely to have a guide on since RDR was introduced.
The question for the pension companies is who will take the blame when things go badly astray. We live in a society that seems to abhor the idea of personal responsibility. Whenever something wrong we are encouraged to feel that it must be someone else’s fault. This is an approach that is exacerbated by politicians, who are inclined to court popularity by hitting out at bogeymen on behalf of their constituents rather than facing people with the reality that their predicament is the result of their own poor choices. How much more will this be true when those who have messed up are poor pensioners without the ability to get back into the earnings market; the ultra-strong grey vote which is powerful beyond its size?
Technology makes things happen quickly. Unfortunately this means that it can enable disasters just as quickly as it can enable triumphs. Pension companies looking to upgrade their facilities to provide consumers with easy access to control their pension finances must realise that there will be many users who get it wrong, some of whom will be looking for someone to blame. As such, the ability to carry out financial transactions must be provided in some way that ensures there is no element of encouragement involved and that the user is clearly aware that they are doing so at their own risk. Even simple things like commentaries on likely movements in the markets may become fraught with danger as a casual mis-wording could be taken to be taken as leading the individual down the wrong path.
This doesn’t mean that companies should desist from heading down this route. Putting power into the hands of the consumers to manage their own money is clearly where the industry is headed. It’s important to remember that this needs to be done carefully as financial products are not like books and there is a fine line that firms have to walk between enabling and encouraging. Festina lente, may be the best approach for an industry where the Caveat Emptor rule doesn’t seem to apply.
Actuarial Post is an online publication offering actuaries insight into the market, an extensive library, news and the latest job listings. With a dedicated comment section; the most talked about topics in the actuarial market are discussed by actuaries dealing with the issues on a daily basis. Articles focus on the latest trends changes in regulation and the areas of pensions, investment, life and insurance.
Google Plus: TomMurray
What do you think? Let us know in the comments below!