With new pension rules coming into force next April, providers are looking at providing flexible ways for the over 55’s to spend their pension pots
The Telegraph reported yesterday that London-based, WisePensions, will offer the UK’s first pension credit cards. The pension credit cards will enable pensioners to retirement funds to cover day-to-day expenses once they have turned 55. The new cards can be used in high street shops, cash machines and online, allowing their customers to treat their pensions like ordinary bank accounts.
At the end of each month the card’s balance will be cleared using cash in the customer’s pension pot, but there will be a spending cap so pensioners cannot fall into debt. Already, major insurers are indicating that they could develop similar services to give the flexibility needed following the changes.
When Chancellor, George Osborne announced in the budget this year that we could take our whole pension pot in cash and use it like a bank account, some commentators said we could not be trusted to spend our pension pots responsibly.
Remember the Daily Mail and other newspapers articles at the time? If they were to be believed then we would have all been rushing down to the local Ferrari or Lamborghini garage once we had cashed in our pension pots.
But it’s like everything in life. Alcohol can be drunk responsibly, but there will always be a minority that will abuse it. You only have to visit an accident and emergency department on a Friday and Saturday Night to see overstretched nurses coping with patients who are intoxicated.
It seemed that the minority could ruin it for the sensible majority, but it seems from the announcement today that attitudes have changed and that we can be trusted.
Steve Bee, founder of Jargonfree Benefits, a pension technology firm, told the Telegraph: “This is a marvellous development and the ultimate sign of trusting people with their own money. The first big-name insurer to offer a similar card will have savers flocking to transfer in their pensions.”
The Telegraph reported that pension companies are finalising plans to provide simple access to savings, with one FTSE 100 insurer admitting privately that a debit or credit card option “had been discussed”.
The National Association of Pension Funds (NAPF) said many pension firms been unable to update their computer systems quickly enough, with millions of customers facing a year-long wait for full access to their money.
WisePension hopes to lure many of these customers to its credit cards from late 2015, the company said, with savers able to transfer-in their funds as if they were moving current accounts.
Jon White, chief executive of WisePensions, said: “Technically, we can’t limit how much of their pension people spend on their cards, but we will be doing a lot to encourage people to spend responsibly.”
Savers will track their purchases and balance using an online “dashboard”, he said, which will look “very much like online banking” and include tools to work out their tax liabilities.
Last week, Graham Vidler of The National Association of Pension Funds (NAPF) said it was “inconceivable” that unfettered access to pensions would be available for all in April 2015, as the Government intended. The Treasury accused it of “scaremongering” and urged companies to develop new cost effective methods to withdraw money.
Estimates suggest a saver with £20,000 will typically pay £600 a year to access their money in instalments. WisePensions said it was yet to determine a price for its credit cards.
Malcolm McLean, a consultant at pension firm Barnett Waddingham, warned that the new cards could lull savers into a false sense of security in thinking that their pension is exactly like a bank account.
He said: “Anything that makes getting money out of your pension simpler is potentially a very helpful thing. But people have to understand that a pension is not the same as a bank account, because with a pension you will be taxed on some of your withdrawals.”
‘Before they start using the cards, savers will be asked to decide whether they want to take their 25pc tax-free lump sum immediately, meaning that all their initial withdrawals would be tax-free, or whether they want to have tax relief applied on a pay-as-you-go basis, meaning 25pc of every withdrawal would be free of tax. Then, once their account is up and running, they will be asked to reselect this option every year.’
Jon White, said: “Technically, we can’t limit how much of their pension people spend on their cards, but we will be doing a lot to encourage people to spend responsibly.
“We are developing an online dashboard that will look very much like online banking, with lots of tools to help people understand budgeting and the tax rules.”
But it will be the responsibility of customers to keep their pension firms updated on their tax liabilities. If customers fail to do this, they may risk paying too much tax on their pension, and will face an arduous process if they want to reclaim it from the taxman.
Even though there will be wide-ranging ways to access your pension pots the complexity of the market will create even more demand on adviser to help consumers navigate products and services raising concerns if the industry will be able to cope next year.