At a hearing of the Taxation of Pensions Bill committee on Tuesday, David Geale responded to Labour MP Pat Glass’s question about whether flexi-access drawdown products are unsuitable for those with smaller pension pots because of the charges and high investment risks.
Geale said: “We previously said that for customers with under £50,000 in their pot it was unlikely to be suitable to access drawdown under the current product range.
“But there is no reason why over time flexible access products need to be poor value for money or to represent a high element of risk; it is about people understanding what they are getting into.”
Under the current regime, policy holders are required to have a certain amount saved in their pensions before investing in these products.
However, Geale said “there is no reason why” this should continue. “We will have to see how the market develops over time,” he said. “With the new freedoms – like the ability to access the uncrystallised lump sum – you would expect to see competition take effect in that market as well. So we might hope to see charges come down over time.”
The FCA has said it will not introduce rules to limit drawdown levels but will leave it up to the providers and the advisers to provide guidance and assess the suitability of products.
“Really disappointed”
During the hearing, Glass said she was “really disappointed” to hear that less than 3% of people took up guidance offered to them, before proposing that rules should be built in to the new legislation to protect consumers drawing down (large lump sums of money) directly from their pension fund.
But in Parliament, pensions strategy director of Legal & General, Adrian Boulding, argued that the new flexibilities should not apply to some consumers.
He said: “I fully support the idea of guidance and whatever help we can give consumers in doing that, but we have taken that leap. The toothpaste is out of the tube.
“We have told consumers that it is their money and it is up to them how they spend it. Now we press forward and do our best to support them with products, information and guidance.”
“No magic or science”
Gary Boal, managing director of Boal & Co, said: “There is no magic or science behind a £50,000 figure, in my view. One could equally argue for a figure like £25,000 which, according to figures produced by The Pensions Regulator, is the average retirement pot for DC members retiring in 2013.”
He added that details outlined in the Taxation of Pensions Bill for the concept of Uncrystallised Pensions Funds Lump Sum (UFPLS), due to be implemented in April next year, makes more sense than income drawdown for a £25k pension pot.
“The UFPLS concept has very much been created for exactly this demographic – the £25k pot is too low to economically access most flexible drawdown products, and is not well served by what was judged to be a malfunctioning UK annuity market.”
But he also pointed out that although £25k is a viable figure to encash a pension pot through the UFPLS, much above this amount, to £50,000 and above, “the tax pain of the UFPLS grows, and UFPLS does not work”.
