16/09/2016
Tax and benefits problems follow pensions freedoms says Citizens Advice
Citizens Advice have published an important report about the consequences for some people of using their pension freedoms.
"While the full effects of pension freedoms will take years to emerge, a minority (12%) of consumers experience immediate and unexpected tax or benefit implications. These can include falling foul of deprivation of capital rules around welfare entitlement or facing unexpected tax deductions."
Their findings on the tax impact are not unexpected,
"�While most consumers have had the tax treatment they expected, 9% of consumers had unforeseen tax problems, including 30% of those who took their whole pot in one go ... “They told me about the tax on the pension but what I possibly wasn’t aware of was that they would look at my other income and put me on emergency tax because it looked like my income was going to be much higher.” "
Nor are their comments about benefits.
"�Also, 6% of consumers face unexpected benefit problems, such as a reduction in welfare payments or losing eligibility entirely. This affects a greater proportion of those with lower pension savings (including 11% of people with pots worth less than £20,000)."
What they don't point out is that £20,000 is about the 'mean' level of pension savings. About half of all people with pensions savings have less than that amount. A great many of those people will be entitled to means-tested benefits (as will many with higher savings of course) and too many will be facing financial pressures which could mean that taking their pension savings can look very attractive.
If they do that without understanding the effects on their tax and benefits then they may end up seeing a very small real amount extra in their pockets - for some there will be no gain and, for a very few, they may even be worse off.
The report recognises the issue.
"�Consumers accessing more than their tax free lump sum should be given or signposted to further tax information, covering both the basic principles behind pensions taxation as well as practical details, such as around emergency tax codes and how to claim rebates. A similar approach should be taken to people in receipt of welfare payments."
But again, it doesn't seem to go far enough. What people need is accurate, personal information. That means the real numbers for their situation so that they can see the actual figures for their tax and benefits which will show the before and after, money in their pocket, real gain (or loss), bottom-line amounts.
That's not hard to do, using systems like Ferret's pensionForward, but it's not what you get from a CAB. Most financial advisers, even where they deal with clients with those kinds of savings, don't do it. Pension Wise is not, currently, allowed to do those sort of calculations.
Without those individual assessments how are people expected to make good, informed choices?
The report is:
Life after pension choices
Consumer reflections on pension freedoms and thoughts on the future
CitA August 2016
