The pension freedoms mean changes should be made to protect consumers.
Many are making use of rights under the UK Government’s pension freedoms regime to withdraw large sums from their pension pots, but would a cooling-off period help those who are unaware of the implications?
Under current regulations, those who withdraw over 25% of their funds will find themselves presented with a large and potentially unexpected tax bill. Anything over this amount is taxable at their income tax rate as if it were a normal monthly salary payment, and emergency tax can also come into play. While people can claim this back, they should carefully consider the impact of a reduction in available funds.
There is a further implication that anyone withdrawing over the 25% amount will face restrictions on their ability to save in any future pensions, including contributions from an employer. This limit is set at £4,000 per year, with any extra funds subject to tax as if they were income.
Cooling off period
Financial advisers are now calling for a 30-day cooling-off period for those looking to make a withdrawal beyond the limit who have not had the benefit of regulated financial advice. The advisers’ aim is to try and prevent those who are unaware of or confused by the rules from acting rashly while understanding the consequences.
Alongside this, there are also calls to put a clear warning into place about the tax due and the restrictions on future tax-exempt pension savings. The hope is that this will give consumers a chance to think carefully about their decisions and encourage them to seek financial advice before proceeding.
Most people want to take advantage of the pension freedoms rules, and as the options available to savers increase, the importance of professional financial advice can only grow. The challenge will be for financial advisers to not only connect with those in need of guidance but also continue to offer valuable expertise in the changing pensions landscape.