Those “waking up to money” or to headlines in selected media (ahem!) will be gasping over their croissants at the headline. Is this a further raft of legislation ?
You’ll be pleased to hear it isn’t! It is in fact the rebadging of what Will Robbins affectionately labelled FLUMPS.
The Flexible Lump Sum rules proposed by this Government to allow us to take tax-free cash as we drawdown out pensions
You will remember that I have written positively about the opportunity to take your income from your pension pot a quarter tax free. It means that if you had awarded yourself an income of 4% of your pot, you will only be taxed on 3%, unless you are a nil rate tax payer (very poor or very rich).
FLUMPS is a way of boosting your in retirement income whether you want to set it as a regular monthly amount (like pay) or as a series of lump sums where you are managing your cash-flow exactly.
At the moment you can only FLUMP (use flexible lump sum payments) from your DC pot and you can’t choose to have your annuity FLUMPED or choose to have your defined benefit payment (or dare I say it your CDC payments FLUMPED) but that is the logical next step.
This is about three things – TAX – CASHFLOW -INVESTMENT.
To FLUMP your income in retirement you are choosing not to take the 25% of your fund available from 55 upfront. Instead you take a quarter of every payment you receive tax-free and the rest is taxed as earned income. There are weird things that happen to your capacity to recycle pension income and oddities about your lifetime allowance and if you are “pension wealthy” you should be talking to your pension wealth manager about them. But the main thing to say about tax is that by deferring your tax relief you get tax relief on any growth in your fund and more of your fund grows tax free than would do had you taken tax-free cash early and kept the money in your bank .
Here taking your cash up front should have the advantage. No matter how George paints it, your pension pot is not going to be quite as flexible as your telephone or internet banking service.
It will take a long time till pension providers can operate to the speed and efficiency of our best banks (First Direct) and provide cashpoint access to our money at the press of a button. However, if you are living within the 30 day credit card cycle, FLUMPS should be capable of paying off your credit card bills, albeit you’ll have to manage this manually!
We haven’t got to a point where your credit card company demands the money from your pension pot via a direct debit though this day will come!
Note to banks and payroll software providers; In the long run, pensioner payroll could be a banking function for those who need the flexibility (though this is unlikely to ever be the mass market solution). Get talking to each other!
My worst worry about the new pension freedoms is a mass migration to cash. If the British public draw their cash (and maybe the entire pot) to their cashing account, they will be depleting the market of massive amounts of investable capital, they will be missing out on the dividend streams from equities and they will be failing to participate in the long term growth in UK and global economies.
Put simply, taking large amounts from pot and letting it idle in bank accounts is good for no-one.
FLUMPS should allow money in pension pots to remain invested in strategies that provide long term capital growth without too much volatility. I say this tentatively as I am very far from convinced that individual drawdown can provide the degree of capital protection and a reasonable income (let alone insurance against old age).
However FLUMPING is a better investment alternative than taking all the money at once and should mean that more people remain invested for longer.
So I give the new Flexible Lump Sum rules to be announced in today’s pension bill a thumbs up. They should mean people can pay less tax, still manage their cash flows and stay invested for longer. I will certainly be FLUMPING rather than using conventional drawdown, though what I’ll be FLUMPING from remains to be seen.
That is IF the market lets me!
Every time I have a conversation with pension providers (and I do this a lot), I ask if they will be allowing income to be paid under the new rules from 2015.
The answer is along these lines
“do you know how much work we have in the pipeline- we simply can’t deliver on this any time soon”.
I think it unlikely that any of the large insurers will announce the facility to use the new rules which are passing through parliament today, from the point at which they will come into force (April 2015). So for anyone standing at the front of the queue to use their new pension freedoms next spring, they are going to have to be careful.
Take all your cash out of your pension day one and you have taken an irreversible decision. It’s the kind of irreversible decision that the Treasury dreads as (like purchasing an annuity) a moment’s thoughtlessness can lead to a lifetime of regret.
Treating customers fairly?
I am not on the provider’s side on this. They have had 25 years to innovate, they sat on their hands and banked profits. Now they will be squeezed as new models emerge which ovrtake theirs.
I don’t see Pension Providers (especially insurrers) protecting themselves with hefty charges. This market is likely to be competitive , effecient and popular.
We’re so pleased with these changes that we are actively engaging with payroll companies (including the one we use at First Actuarial) to code in the capacity to FLUMP pensioners.
If the insurance companies and large master trust are not going to give people the option to pay people income in retirement under FLUMPS, then perhaps we will.
And if the insurers and large master trust providers (including NEST) , sit on their hands, I expect many people reading today’s headlines will ask just why they couldn’t respond to change and provide something that they (and the market) had been promised.
WHAT I WANT!
I see no great advantage of taking tax free cash and putting it in my bank account for years. If I’m not using my TFC to pay off debt then it should stay in my pension pot for as long as possible.
I want it invested for the long-term and I want it to roll up tax-free,