MPs have been urged to change pension tax rules to allow savers to access tax-free cash from their pot at the normal minimum pension age whilst leaving the rest of the balance behind, in an effort to reduce “consumer harm” and ensure the "best of both worlds".

In its response to the Work and Pensions Select Committee inquiry into pension freedoms, and subsequent call for evidence on options and advice, LCP has called for a broader change to tax rules to protect members savings.

In particular, it argued that the change would help overcome the losses to consumers who either take 100 per cent of their pension and put the balance in a cash account, or who take a 25 per cent lump sum and move the rest to a higher cost and worse-performing drawdown product.

LCP partners, Laura Myers and Steve Webb, pointed out that the most common choice made by savers when accessing their pension for for the first time is to withdraw the full amount in cash, with 55 per cent of savers taking this option between October 2019 and March 2020, equal to over 174,000 pots.

They also warned that the large majority of people are not taking advice or guidance on how they withdraw their pension pot or what they subsequently do with the money.

Indeed, research from FCA that showed that whilst 6 per cent spent the whole pot in one go, 20 per cent invested the funds, and 32 per cent put the money into a current account, savings account, or cash ISA.

LCP warned, however, that those who put the balance in a cash account are moving from a low-cost environment where their money is carefully managed for growth to a deposit account earning next to no return.

Furthermore, it stressed that savers who do move the rest into a drawdown product are moving from an ‘institutional’ environment to a ‘retail’ environment, where product charges are likely to be higher and where they will have to choose a provider and investment mix.

In light of this, and research which showed that accessing tax-free cash is the biggest single motivator for people accessing their pension for the first time, LCP has proposed a rule change to ensure people can get 25 per cent tax free lump sum whilst leaving the rest invested in their pension, arguing that this represents the "best of both worlds".

The recommendation also mirrors the proposals published by the Financial Conduct Authority in its recent Retirement Outcomes Review.

LCP partner and PLSA defined contribution (DC) committee chair, Laura Myers, commented: “Pension freedoms give savers welcome new choices but there is a risk that current rules for accessing tax free cash are leading to poor consumer outcomes.

“Many people who want to access their tax free cash find it easiest to cash out in full, but then put the balance in a cash account, losing out on vital investment growth on the balance of their funds.

“Even those who put the balance into drawdown risk moving into a higher cost environment with lower returns and poorer governance. Changing the rules to allow people to access their tax free cash and leave the rest in their pension fund could be the best of both worlds”.

Share Story: