Following the introduction of the new pension rules, we have been very concerned to receive calls from a number of customers who have been confused by information given to them by their existing pension provider. Many have been wrongly led to believe that they have no option other than to pay tax on 75% of any lump sum they take from their pension.

Many customers have called their pension provider after the 6th April 2015 and asked to be paid ‘their’ 25% lump sum - clearly meaning the 25% tax free lump sum entitlement that exists within most pension contracts. It therefore came as a surprise when they were told that while they could take 25% of their pension fund as a lump sum, only the first 25% of the 25% they take will be tax free, but they would have to pay tax on the 75% of the 25% pension lump sum they took. No wonder the customer is confused !!!

To be clear, the customer isn’t really being given the answer to the question they are asking. The problem arises from the fact that the pension provider can only discuss what they and their particular product can offer and not what the pension rules allow the customer to do if they use an alternative product or provider. This means that while the answer given to the customer isn’t wrong, it isn’t the full answer.

While using your personal pension like a bank account may be a good idea for some, for many it could see them making unnecessary tax payments to the Government. It is clear that the customers discussed in this article only wanted their tax free cash, yet the only solution offered to them was one that would have seen a considerable and unnecessary amount of tax paid.

Our personal view is that while pension providers cannot give customers advice, they should have processes in place that identify customers who may be making a financial mistake and paying tax when they don’t need to. The Regulator is already investigating annuity sales where it believes that some providers didn’t do enough to help customers make suitable decisions and have suffered a financial loss as a consequence. This new practice of making customers who clearly only want their tax free cash believe that they are compelled to pay tax on 75% of any amount they take, has complaints, compensation and further customer mistrust in the pensions industry written all over it.  

To understand all your options in full and the flexi-access drawdown rules call us now on 020 33 55 4827.