As the government introduces reforms allowing savers to treat their pensions “like a bank account”, experts are warning of the risk of another mis-selling scandal. Under changes first announced in the Chancellor’s March Budget, savers will be granted access
to their entire pension pot from the age of 55. In addition to removing the requirement to buy an annuity, the government is also allowing savers greater flexibility over how they access the 25% tax-free lump sum from their pension.
UFPLS – A New Way to Access Pension Funds
The Taxation of Pensions Bill, currently before parliament, features a new way of accessing pensions – the ‘uncrystallised fund pension lump sum’ (UFPLS). Under the new rules, pension scheme members will no longer have to receive their tax-free lump sum within
18 months of becoming eligible for their pension income. Instead, savers will be able to dip into the money in stages by using the UFPLS option.
UFPLS is different from standard flexible drawdown – to be known as flexi-access from next April –in both the way money can be accessed and how it is taxed. With flexible drawdown, the tax-free lump sum must be taken once the saver begins to draw an income
and any amount taken after is liable for income tax. For example, an individual with a pension pot worth £40,000 could receive £10,000 of that tax-free, with the remaining £30,000 subject to income tax at the point of withdrawal.
With UFPLS, savers will not be required to take the tax-free lump sum in one go and as soon as the pension fund is accessed. Instead, 25% will be tax-free each time money is withdrawn, with income tax payable on the remaining 75%. To take advantage, savers
will need to contact their pension provider and request a specific sum to be sent monthly or annually.
Despite claims that the changes will allow savers to use their pensions “like a bank account”, experts believe that fees involved with UFPLS will make withdrawals far more costly than simply taking money from a bank ATM. In addition to likely withdrawal fees,
pension providers will probably add charges for administering the scheme. Savers may also require the help of a paid financial advisor to determine how best to invest any remaining sum.
Potential for Mis-selling
In addition to high and ongoing fees, there is concern that unsophisticated pensioners will be exposed to unnecessary risk by setting up UFPLS directly without help from a professional financial advisor. Financial advisors are regulated by the Financial Conduct
Authority (FCA) so this offers customers some form of protection against mis-selling. However, there may be little protection for those who withdraw their money without the help of an advisor and invest it in schemes that provide poor returns. This lack of
regulation could result in savers using up their pension funds and being forced to rely on the state pension in later life.
While supporting the new freedoms, pensions expert Tom McPhail of Hargreaves Lansdown urged caution, saying: “Many professionals struggle to get it right, so the idea that at least some inexperienced investors won’t get it wrong is recklessly naïve.” According
to Fidelity retirement director Alan Higham, the FCA should consider putting controls in place to protect consumers from withdrawing too much too soon. In addition, the pensions industry should work harder to help customers make the right decisions. Higham
said: “The best way to avoid mis-selling is for the industry to take responsibility.”
Despite concerns about pensioners’ vulnerability to mis-selling, pensions expert Dr. Ros Altmann believes the government’s planned changes could help millions of savers to put their pension funds to better use. She said: “Being free to access their money freely
as they need to, rather than being forced to buy particular products, will be very popular. However, people need to know that their pension provider will allow them to take advantage of the new freedoms.”
For more information about any of the above or for practical advice on this or any other aspect of banking and financial disputes, please contact
Damian Carter of the Berg Banking Litigation Team on 0161 829 2599 or email him at
(The information and opinions contained in this article are not intended to be comprehensive, nor to provide legal advice. No responsibility for its accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice should
be obtained before taking, or refraining from taking, any action as a result of this article.)