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MONEY BOX

Presenter: PAUL LEWIS

TRANSMISSION: 28th MARCH 2015 12.00-12.30 RADIO 4

LEWIS: Hello. Today Money Box is devoted to one subject – pensions – because in 9 days’ time hundreds of thousands of people will be given free access to the biggest amount of cash they’ve probably ever seen. It’s called Freedom and Choice in Pensions, and from April 6th people aged 55 or more will be able to do what they like with their personal or works pension pot. It follows from this promise by the Chancellor of the Exchequer, George Osborne, in his Budget speech last year.

OSBORNE: I’m announcing today that we will legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots. Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, any time they want. No caps, no drawdown limits. Let me be clear: no one will have to buy an annuity.

LEWIS: It was an announcement no one in the industry expected, and, as the details were absorbed, it became clear just how radical the changes were. Pension pots are built up with a big tax subsidy, but all the rules that constrained what could be done with that partly public money were to be scrapped. So from Easter Monday a pension fund can buy a Lamborghini or give a grown up son or daughter the deposit for a first home; it can pay off expensive debts or buy a round the world cruise. But the one thing a pension fund no longer has to provide is a pension, an income for life – though of course it can and perhaps should be used for that if you want. With these new freedoms come these very difficult decisions: what’s the best thing to do, what will you live on in old age and indeed how long will that old age be? And the Chancellor went on to promise that people would not have to make those difficult decisions alone.

OSBORNE: We’re going to introduce a new guarantee enforced by law that everyone who retires on these defined contribution schemes will be offered free, impartial, face to face advice on how to get the most from the choices they will now have.

LEWIS: Well since then, that promise of advice has been watered down to what’s called "guidance". And guidance itself, now branded ‘Pension Wise’ has become information about what you can do but without a hint of what you should do. Pension Wise will be delivered face to face by Citizens Advice, online by a government website, and on the phone by the Pensions Advisory Service. Money Box’s Adam Bowen went to see how that service was working.

JACKSON: My name is Charlotte Jackson. I’m Head of Information and Guidance here at the Pensions Advisory Service. My role here is looking after the team of our new ‘Pension Wise’ guiders. And here we go in to see our new team who are, as you’ll see, excitingly beavering away at their phone calls that we’ve started taking over the last couple of days.

SHEARER: (making phone call) Oh hello, it’s John from Pension Wise. I just want to make sure that I’m talking to the right person. (fades under) I’m John Shearer and I’m one of the guarantee guidance specialists. My background is in financial services. I’ve been a financial adviser, so dealing with customers and their pension queries, okay, and it’s also for people that have got what’s called a defined contribution pension scheme. Okay one thing I would want point out: this isn’t financial advice. So it’s impartial guidance, so we don’t recommend any products and we won’t tell you what to do with the money.

JACKSON: Actually our bookings, particularly from 7th April onwards, are very busy already, which is great to see. Each guider will be doing at least five calls a day, so that’s a team for us of 45.

SHEARER: Okay so option one is to leave your pension pot untouched, so you can take the money later and it’s up to you when. Option two is a guaranteed income, so in other words an annuity, and this is where you pass your money over to an insurance company and they give you a regular income which is guaranteed for life. Okay so option three is you can always take up to 25% as a tax free cash lump sum, and the other 75% is used to either provide a regular income or you could take ad hoc lump sums. The fourth option is to cash in your whole pot in one go, but you need to consider how much tax you’d pay and what you’ll live on in retirement if you use all your pension in one go. And the fifth option is to mix your options.

JACKSON: Currently our busiest day at the moment is scheduled to be 7th April, as you would imagine. We’ve got, as of yesterday, around 90 appointments on that day and we’ve got capacity to take more.

BOWEN: Busy?

SHEARER: Very busy, yes, but it’s nice to actually get down to what we were taken on to do.

OWEN: Is it fun?

SHEARER: I’m actually enjoying it. We’ve got a great team that we’re working with.

BOWEN: So pension advice can be fun?

SHEARER: Yes. There’s not many people that will say that, but I think so – yes.

LEWIS: Adam Bowen discovering that pensions can be fun. Well of course they can. And I have four people with me today, all of whom find pensions fun. I’ll introduce them as we go along. But first up is Michelle Cracknell. She’s Chief Executive of that service which Adam visited. Michelle Cracknell, people ring your Pension Wise service and you set out choices. Is that enough?

CRACKNELL: Yes, we think so, because guidance is just about getting people started on the journey. And we know from existing experience of people making retirement choices that a lot of people just default into going into the product with their provider. So giving some people some help, some understanding and signposting them as to what to do next is an important step.

LEWIS: But don’t people want to be told what they should do?

CRACKNELL: People do want to be told what to do in some instances. And if they do, obviously as part of the guidance we give them how they can get further information and also go to a financial adviser if they specifically want a recommendation.

LEWIS: Okay well one Money Box listener, Alan Stones (he’s 67) he did want to know what to do with his rather large pension fund. In fact he had deferred doing anything until the pension freedoms began, so he was one of the first customers of Pension Wise and in particular he wanted to know about the tax implications of the various options open to him.

STONES: If I took lump sums, at what point would I be paying extra tax on it? And particularly if I took, for instance, £30,000 in the first year as an annual take, would that be assessed for income tax as a monthly income or as an annual income because if it’s taxed as a monthly income I’d be paying a higher rate of tax on it?

LEWIS: And did they tell you the answer to that?

STONES: Talk to your IFA was the answer I got. They said that they’re not there to offer advice. They’re there to explain to me how the new pension service works.

LEWIS: Well also with me is Alan Higham. He’s Retirement Director at the investment and pension firm Fidelity. Alan Higham, explain how Alan’s money will be taxed if he took it all out.

HIGHAM: Well it is complicated, Paul, so your listeners will have to bear with me. If you take out £30,000 as a withdrawal from your pension fund, then part of it might be tax free depending on whether he’d already taken his tax free cash or not. It wasn’t clear. But let’s imagine it’s all taxable. If it was just a one-off payment of £30,000, we’d be required to treat that as under emergency tax rules and treat it as though he was going to get £30,000 every month, so it would be taxed as though it was 360,000 pounds worth of total taxable income. So we would deduct a tax rate approaching 45% from it. That would probably be too much, more than his actual liability. He would have to claim that back from the Inland Revenue.

LEWIS: Right. And of course Alan has quite a big pension pot. But at the other end, Carol from Sale emailed me yesterday. Now she’s got a low income - £10,364 – just below … She doesn’t pay tax on it; it’s just below her tax allowance next year. She also has a lump sum in her pension of £20,000 and she’d like to get hold of it. And I know you’ve been looking at the figures, Alan, about the tax she’d have to pay. What would happen to her?

HIGHAM: Yes well with Carol, her tax would work in a number of instalments. Firstly, if she took out the £20,000. Assuming she could take £5,000 tax free, then there would be a further 5,197 pounds worth of tax deducted. That would leave her with £14,803. Now that would probably be an over deduction if she only had £10,436 of income and she’d be entitled to a refund from the Inland Revenue of £2,232.

LEWIS: Right so that would leave her paying nearly £3,000, about 15% in tax. But would anyone tell her that? I mean we’ve told her now, but would anybody normally tell you that this tax is too much?

HIGHAM: Well the way we are going to work is if our customers come to us, we will explain to them the full calculations and give them an estimate of what we think they ought to claim back. If they can tell us what their total taxable income is, we can do the calculation, but I think most people will shy away from doing that for fear of making a mistake.

LEWIS: Yes.

HIGHAM: But we’ll certainly tell them that they ought to fill in form P50 or form P53 to reclaim the money back.

LEWIS: And that will come back reasonably quickly, will it?

HIGHAM: Well I don’t know.

LEWIS: We don’t know that.

HIGHAM: I mean we’ve not had any practical experience of seeing it happen yet. If people don’t want to claim the money back using these forms straightaway, the Inland Revenue will do an automatic refund at the end of the tax year. So it might be 12 to 18 months. You’ll get the money back automatically.

LEWIS: Right and we’ve been looking at some other examples. We haven’t got time to go into the figures, but roughly speaking you’re paying anything from 25% to 30% on some of them in tax and then you may have to claim some of that back. Also here is Flora Maudsley-Barton. She’s a chartered financial planner, Director of Parsonage Financial Planning. Flora, have your clients been surprised about the tax implications of taking their pension fund out?

MAUDSLEY-BARTON: Yes they have, Paul. The early enquiries that we’ve had sort of coming immediately off the Budget and over the last few months have been that they really hadn’t expected the difference between the gross value of the pension that they knew and the number that they would end up with after all the tax settlements have been sorted.

LEWIS: And has that put them off?

MAUDSLEY-BARTON: Yeah.

LEWIS: I mean have they thought I’m going to get £20,000, but oh gosh I’m not, I’m going to get £15,000? Does that make them think well maybe I won’t do it?

MAUDSLEY-BARTON: Definitely. I think it’s calmed a bit of the initial exuberance about it and yeah installed a bit of realism, I think, unfortunately.

LEWIS: Now people can come to you. You’re a chartered financial planner, a good financial adviser, you can work it out. Alan Higham, you’re going to have a calculator on your website, but not till next weekend, that people can use?

HIGHAM: Yes we’ve got a calculator going live this weekend for members of our workplace pensions that we look after. And next weekend, for members of the general public who’d be interested, the calculator to enable them to do these sums will go online.

LEWIS: Okay and we’ll be reporting on how to find that on Money Box next week. As we’ve been saying, people can cash their scheme in for £10 notes, but the Chancellor will want his cut. But it’s not just tax that you’ll lose when you take out your pension fund. Here’s what listener Paul Clark wants to know.

CLARK: I’m 55 years old and I’m on unemployment benefit and housing benefits and I need to know how much I can take out of my pension before it affects my benefits. And also I need to know how many times I can take that out a year.

LEWIS: Well with me is Sally West. She’s Strategy Adviser at the charity Age UK. Sally West, how will pension money affect benefits?

WEST: It’s an important area that many people will need to consider. If somebody’s getting one of the kind of means tested or income related benefits such as jobseeker’s allowance, or (if you’re older) pension credit, then income or capital that you receive from your pension fund could make a difference. So if you receive a regular income, that will be treated as income and affect the amount of benefit you get. If you get a capital lump sum, a sort of ad hoc lump sum, then it could make a difference if it takes you over the capital limit. So in the case of somebody getting unemployment benefit or jobseeker’s allowance, you can have a total of £6,000 in capital without that affecting your benefit. After that, it makes a reduction. If you have more than £16,000, you wouldn’t get anything.

LEWIS: Have these rules been changed because it’s going to be difficult, isn’t it, because nowadays … You used to be able to either take the cash or get an income through an annuity, but now you can take the cash and then pay yourself an income. How will that be counted?

WEST: Yes, I mean basically they’re the same rules that have been in place for a long time. And with the new freedoms and flexibilities, the situation is going to be different, and what the DWP have said is they are going to monitor what the situation will be.

LEWIS: But at the moment the rules aren’t any different. But there is a big difference once you reach women’s state pension age – about 62.5 years old. What’s that? 

WEST: Yes, that’s right. The fund that Paul has now, if he doesn’t draw anything it’s not taken into account at all. An undrawn pension fund isn’t taken into account if you’re of working age or under state pension credit age – which, as you say, is about 62.5 because it’s linked to pension credit age, women’s state pension age. Once you’ve reached pension credit age, again any income or capital may affect what you get. But also if you have an undrawn fund, that will be taken into account. It’s not counted as capital, but you’ll be assessed as having what they call a "notional" income. Basically you’re assumed to draw income from your pension fund once you get to that age.

LEWIS: So even if you don’t draw it, they will assume you have and adjust your benefit accordingly? And there’s a standard table, which I won’t go into, that they judge your income on, isn’t there?

WEST: Yes, yes. And so it’s quite complicated because the different benefits have different rules, but I think anybody who’s receiving these benefits – or might do when they stop work and want to draw their pension – really need to make sure that they’ve understood the implications.

LEWIS: And Michelle Cracknell, can Pension Wise help with this?

CRACKNELL: We do reference benefits and make people aware that if they are on benefits what they do with their pension fund could have a difference. We don’t go into the detail and I think it’s important for people to realise that when they have a guidance session, they may have to go to three or four places afterwards to get further information and source details about their personal situation.

LEWIS: So there’s no one-stop shop to find all these things out?

CRACKNELL: I’m afraid there’s not. Pensions are so complicated and of course people’s situations are different. So yes people should have an expectation that after a guidance session, there will be more work to do.

LEWIS: Right so tax and benefits chipping away at the money you get, but what should you do with I should say whatever HMRC and DWP leaves you with? We heard earlier about the five options from Pension Wise and, Michelle Cracknell, just remind us briefly what those five options are.

CRACKNELL: So we’re describing the choices that you have in five ways. The first one is just to remind people that even though you’ve reached your normal retirement date or selected retirement date on your policy or scheme, you don’t necessarily have to take the benefits if you don’t need it. We then talk about the three specific ways of drawing benefits, which range from buying an annuity, taking money directly out of the pension fund as and when you need it, and the fourth one is cashing in your pension fund on which you will have to pay tax. And finally, we remind people that actually it’s not one or all of the options. You can mix them and do, say - for example - a bit of annuity and a bit of drawdown.

LEWIS: I think five choices is probably more than enough for most of us. But even among those, like drawdown as you said, there are two or three ways to do that, aren’t there? Alan Higham, just tell us what they are.

HIGHAM: Yes there are two distinct ways of doing it. One’s called flexi access drawdown and that’s where you can take as much or as little as you want in chunks. And then there’s the uncrystallised pension fund lump sum where you just slice bits of your pension and leave the rest of it untouched and each slice would be typically 25% tax free, 75% taxable.

LEWIS: So they come with different tax treatments. And also what about the charges? We’ve had people tweeting indeed this morning and emailing saying these are quite expensive options.

HIGHAM: They are quite complicated products and the charges can also be quite complicated. There could be eight or nine different types of charges, which makes them very difficult to compare. People should shop around and do their best, but I do recognise that it is difficult, probably even more difficult than shopping around for an annuity.

LEWIS: Yes and few enough people did that, didn’t they? That was one reason that they were thought not to be a very good idea eventually. Now people go for guidance. We heard earlier from Alan Stones who wanted to know about tax and here’s what Alan Stones thought about these choices, about this part of the guidance.

STONES: It was well prepared, it was well put out, but if you didn’t have any idea yourself of what options you wanted and you were expecting them to come with a plan for you, you weren’t going to get it. They weren’t able to tailor it to me. They’re saying that your IFA is the person to talk specifics about. They certainly didn’t come up with and say we’ll send you a list of potential IFAs in your area, if you like.

LEWIS: So again find a financial adviser, an independent financial adviser, get advice. Michelle Cracknell, that’s twice your service told Alan to find an adviser. How does he go about that? How do you recommend people go about that?

CRACKNELL: Well, first of all, the pilot that Alan was involved with, we are evolving the guidance sessions to try and improve it as we get more and more customer data.

LEWIS: So it’s a bit different now, but …

CRACKNELL: So it is a bit different. However, for a lot of people who are seeking for somebody to give them a definitive course of action, they will need to go and find a regulated adviser. So we are directing people to the Money Advice Service website that gives you the things to look for when you go and look for an adviser. It lists some directories and ultimately the Money Advice Service will be launching its own directory shortly.

LEWIS: But that won’t be just independence, will it? It will be everybody. And Flora Maudsley-Barton, you are a financial adviser obviously. What can you do that guidance can’t? Why is it worth coming to you?

MAUDSLEY-BARTON: We can tell Alan and people like him what we think that they should do. We can use our qualifications and experience and a lot of information about his personal circumstances to roll all that up into an ‘I recommend’; "With all that together, here’s what I think you should do."

LEWIS: So this moves from this is what you can do to this is what you should do in my professional opinion?

MAUDSLEY-BARTON: Yeah, indeed.

LEWIS: What will that cost?

MAUDSLEY-BARTON: That’s going to vary quite a lot. I can’t say from an independent perspective that anyone can deliver that for much less than at least £1,000 or so and I think it’s going to go from there.

LEWIS: Now if you’ve got £100,000, £1,000 might seem a bargain; but if you’ve only got £5,000 or £8,000 – as many people will have – is it really worth spending £1,000 to find out what to do with it?

MAUDSLEY-BARTON: It’s hard to say how much value we’ll add there, but everyone should quote the fee in advance and let the customer say that’s not worth it or that is worth it.

LEWIS: Sure. And I have been tweeted this morning by some financial advisers saying they’ll charge a lot less than that. Alan Higham, are there going to be new models of advice where you don’t have to do a massive 80-page fact find as you do under the present rules?

HIGHAM: Yeah I’m sure there are and everybody’s needs are different and not everybody wants full advice. People may be happy with having two or three particular points answered, so you could have very focused advice limited to certain things and keep the cost down to a few hundred pounds.

LEWIS: And so you think it could be done for less. And how will that fit in with the Financial Conduct Authority’s rules?

HIGHAM: Well the FCA have set out a framework for this to operate. Those rules are new and not everybody’s sure how they’re going to work in the industry. So I think it will take some time to bed down before we see those sorts of services emerge, but I expect over the next two or three years we will see more and more perhaps using advice online to try and get the cost down for that type of customer. 

LEWIS: Yes. And, Sally West, do you think people that come to Age UK for help will pay for financial advice or will they just think it’s too much?

WEST: Well I think people will have to add up whether they think it’s worth it, and if people have only got a small amount of money then they may not. But I guess there are other things that people can do themselves, which is look at their overall financial position, and try to do as much background work on their own – find out what the state pension is, what the state pension age is – and then they’re much better placed to make decisions or look at the pension options.

LEWIS: Yes, so people have got to do quite a bit of work, haven’t they, on their own before they even go for guidance or advice. Now I’m very conscious that we’ve been talking about freedom - how money can be used and what you should or shouldn’t do with it - but people have been tweeting and emailing to say their pension provider doesn’t know about it. Brian Welsh said that his pension provider says it hasn’t even discussed the new legislation, it’s not obliged to do anything. Michelle Cracknell, are pension funds obliged to give you this freedom?

CRACKNELL: This is a really good point because we’re hearing it on our helpline a lot. The new legislation has to be adopted by the pension scheme or the pension provider’s policy and, therefore, for some people they will not be able to access the freedom from their specific policy and it will require them to move to another policy before they can access the freedom.

LEWIS: But we’ve also been hearing that that will be expensive and David’s got a local government defined benefit scheme and he hasn’t been able to find a financial adviser to help him move it.

CRACKNELL: Yes now there’s another situation for people in public sector schemes. These are usually defined benefit schemes and of course they would need to transfer out of the defined benefit scheme before being able to access the freedom and choice. And not all public sector schemes, you can transfer out.

LEWIS: No some have been banned, haven’t they, so that really could cause problems. So freedom for people with a pension pot, but in other schemes you may not have the freedom or you may have to fight for it a bit or argue about it and some of them don’t have it at all. That’s really all we’re going to be able to say about that side of it because we’re running out of time. But I want to finish by asking my four guests their one tip for Monday 6th April when what the government calls "Pension Freedom and Choice" beings. Alan Higham?

HIGHAM: Well lots of people ringing our helpline are confused. They think 6th April’s the deadline to get it all done by. So don’t panic, relax, it’s only the start. Take your time and make a good decision.

LEWIS: Sally West?

WEST: Yes I’d definitely say don’t rush into things. There’s lots of options. The old options of just drawing an annuity are still there. Think about all the implications, including for your tax and benefits.

LEWIS: Yes tax and benefits and you can have an annuity, an important point. Flora Maudsley-Barton?

MAUDSLEY-BARTON: Think everything through, get the guidance. And then if you want to be told what you should do, that’s the point to look for advice if you need it at that point.

LEWIS: Yes. And Michelle Cracknell, what are you going to advise people to do on Easter Monday?

CRACKNELL: Stay in bed, eat their Easter eggs. (Lewis laughs) But definitely talk to a pensions’ expert before you take any action. Some of the actions that you may take are irrevocable. Some of them could have some short-term downsides and a lot of them would have very significant long-term implications. So do talk to a pensions’ expert either through the guidance service or with an IFA before you do anything.

LEWIS: Yes so this should be a process rather than something you do immediately. And I should say Pensions Minister Steve Webb is quoted this morning as saying – and he’s said similar things to me in the past – "These are decisions you make for the next 30 years. Why would you make a decision on April 6th? Take a deep breath is the best advice I could give anyone." And of course eat those Easter eggs. Just because you can doesn’t mean you should.

Well I’m sorry to say that is the end of today’s pensions special. I hope we’ve made it fun. I think my four guests have. I’ll thank them: Alan Higham, Sally West, Flora Maudsley-Barton and Michelle Cracknell. Thanks to all of you listeners. And people are tweeting. Somebody’s tweeted to say ‘Negotiate your IFA fees. You might get them cheaper than they first say.’ For all those questions we didn’t answer, I’m back on Wednesday with Money Box Live which will take your questions on pension freedom and choice. The pensions phone-in: Wednesday at 3 p.m. here on Radio Four. There’s more information on our website: bbc.co.uk/moneybox. Scroll down for the links. There you can also listen again because once is never enough, is it? And this week, for one week only, there will be a transcript because there’s lots of complicated things we’ve been dealing with. I’m back with Money Box next weekend. Today the producer was Lesley McAlpine. I’m Paul Lewis