How the pension changes could leave you worse off

Sweeping changes have been made to pensions this year, offering new freedoms to people from the age of 55. These have been widely well received, but the stream of new rules is a lot to take in, especially when more people feel confident explaining the Big Bang than income drawdown.

The change making news today is called Uncrystallised Fund Pension Lump Sum (UFPLS), which allows people to withdraw money from their pension fund through their insurance provider, without advice and without needing to purchase an annuity or move into income drawdown. Of each withdrawal, 25% will be tax-free and 75% will be taxed at the marginal rate.

The lack of advice is worrying and undermines the fact that retirement finances is a complicated topic that shouldn't be taken lightly. It also goes against the government's commitment to free and impartial guidance at retirement with the new pension changes, and instead sends the message that people should have no reservations about taking money out of their pension as and when they want to.

However, doing so has inherent risk. For example, if someone is earning £30,000 and then withdraws £5,000 from their pension fund, they would be taxed on £3750, which would push them into the higher rate tax band.

Even more concerning is that there will be no regulation overseeing UFPLS. A lack of advice and regulation creates the perfect scenario for a future scandal, as people can deplete their pension funds and possibly increase their tax liabilities with no requirement for organisations to explain the risks along the way. With the PPI misselling scandal still fresh in people's minds, it could be that insurance providers are unhappy to take the risk of providing unrestricted access to pension funds and instead direct people to advisers, but there is currently no legal requirement to do so.

Providing people freedom with the money they have saved has been a welcome move, but the changes have happened so fast it can be easy to forget that the purpose of a pension is to provide an income through retirement, and may be needed for 30 years or more. That can be tricky, especially for smaller funds, and all decisions about the fund need careful consideration and independent advice that considers each individual's specific circumstances.

The introduction of UFPLS introduces the potential for reckless decisions and without FCA regulation, the next few years could see a lot of problems, especially as it seems to be an opportunity for rogue companies to try and take advantage of people in a similar way to what we have seen with pension liberation schemes.

If you are eligible and thinking about removing money from your pension, it's extremely important to talk to an independent adviser to see if it is suitable for your circumstances.

Are you pleased with these changes? Let us know with a comment below.

Call 0800 304 7288 for a friendly chat about your pension

The details provided in this article are for general information only and are in no way deemed to be financial advice. All of the material is correct as of the publication date, but could be out-of-date by the time you read the article. For our latest information and news, please see our articles section:

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