Better regulation please

Another week, another pensions reform announcement. At the moment, the pace of change feels relentless.

But, for once, the detail of this particular announcement wasn’t important (even to pension geeks like me). Instead, what was significant was the packaging of the announcement, and the reactions it provoked.

Let’s cover the detail to start with. Under the new rules, (if schemes offer it) people can take money from their uncrystallised funds once they reach the minimum age. 25% will be tax free, and the rest taxed as income. This differs from drawdown, where the whole 25% tax-free cash can be accessed in one go, without touching the other funds.

This is not news. We knew all this from previous HMRC announcements. It had even been given a (typically) non-friendly pension acronym of UFPLS, just so normal people wouldn’t have a clue what it meant. And it had two functions. First, to allow a form of phased retirement. And second, to help those schemes who didn’t want to go to the trouble of introducing drawdown (FAD) to provide a way of allowing their scheme members access to their funds on retirement.

But all this has been turned on its head. The Treasury has taken this concept and packaged it very neatly indeed. The headlines this week scream out ‘access pensions bank account’. Isn’t that lovely and friendly? So much better than UFPLS, don’t you think? I think it’s a masterstroke. UFPLS goes from an unloved unwanted concept to a must have.

But it has provoked strong reactions. One must be fear amongst pension providers and schemes. They were busy drawing up plans to offer drawdown to scheme members from April. Only those who couldn’t be bothered with that would have even considered UFPLS. But now, all schemes will be forced to at least think about whether to offer it. Otherwise they risk denying members their ‘freedom’.  (Although my experience is most people want to simply take all their tax-free cash in one go as soon as they can.)

Getting this additional requirement in place for April is going to be a headache schemes and providers can do without. Plus can any provider or scheme live up to the promise that the phrase ‘pension bank account’ evokes? Will people be able to get hold of their retirement fund from a cash machine? Doubt it. The banks with their technology, however, may become interested in accepting transfers of pension funds.

Another reaction is the ‘freedom vs protection’ debate. This has been simmering for some time, but has really caught fire this week. On the one hand some argue people are responsible savers and will therefore be responsible spenders. We should give them the freedom to take their money when and how they want to. And these latest announcements – pensions bank accounts and changing tax rules on death – only encourage people to do the right thing, and not squander their money but leave it in the pension environment for when it’s needed.

On the other hand, there is a growing voice arguing that we are creating a whole host of freedoms with little or no regulation, and that this has the potential to end nastily for some.

I find myself in the latter camp. Of course I trust people. Of course I think they are responsible. But I know that taking a sum of money and making it last for a lifetime is a really difficult trick to pull off. People need to be aware of the risks and if possible protected from them. And that’s the job of good regulation.

The Treasury is hell bent on creating the tax environment for pension freedom. Let’s be honest, it’s a vote winner, at a time when winning the ‘grey vote’ (before it walks to UKIP) has never been as important. But the FCA seems to be on the back foot and playing catch up. It has been thrown several balls over the past few months and is struggling to keep them all from dropping. The flagship of the guidance guarantee is obviously its focus. But its regulation around retirement income is woefully inadequate for the new world.

I’m sure the FCA is busy working on rectifying this. But decisions are being taken now by advisers and people about retirement income, even though the new rules don’t come in until for another six months. So, we need to see updated regulation, including how to protect people under the new rules. And we need to see it soon.