Ministers warn pension providers to stop dragging their heels.
Many simple pension transfers still take far too long, the government told the pension industry last week, amid mounting frustration about the delays and bureaucracy that so often dog savers trying to move money.
The row concerns savers who want to move their pension funds from one defined-contribution (DC) plan to another, either as they switch employers, or because they want to change the provider of a personal or stakeholder plan. Unlike transfers out of final-salary pension schemes, where regulators have put in place rules to protect savers at risk of mis-selling, transfers from one DC plan to another should be straightforward.
However, while electronic transfer technologies should mean most such transfers can be completed within a fortnight, many of the industry’s largest pension administrators still rely on paper-based systems and the postal service.
As a result, transfers involving one of these providers routinely take as long as three months. The average transfer takes 36 days, according to research published last year by robo-adviser Nutmeg, but in the worst cases, savers are being forced to wait more than six months.
Expensive and inconvenient
The slow pace of many transfers is potentially expensive for savers as well as inconvenient – it may leave people trapped in under-performing plans or schemes with higher charges. In all, the delays could be costing savers as much as £1bn a year says PensionBee, a company designed to help people consolidate pensions on one website. On top of that, there’s the potential cost of missing out on pension contributions from a new employer.
Savers caught out in this way have a right to complain about the mishandling of their transfers, with the Pensions Ombudsman regularly ruling on such cases. However, while the regulator works on the basis that a transfer should take no longer than six months, it can be difficult for savers to secure compensation for delays that don’t breach this deadline, even though they should be entirely unnecessary.
Pension transfers should take no more than a few weeks, the pensions minister told the Association of British Insurers conference last week, warning that industry plans to simplify and standardise transfers would mean providers had no excuse for delays. However, there is currently no regulatory requirement for pension administrators to drop paper-based systems in favour of electronic alternatives.
Lifetime allowance claims more victims
More pension savers than ever are paying extra tax because of the lifetime allowance (LTA), according to asset manager Old Mutual Wealth. Government tax receipts from the LTA now run into hundreds of millions of pounds.
The LTA sets a limit on the amount savers can build up in private pensions – this includes investment growth and tax relief, so it’s not a contribution limit, but rather a limit on the entire pot. Any money saved in a pension over and above the LTA is taxed at 55%. The allowance has been cut several times, and currently stands at £1,030,000, down from £1.8m in the 2011-12 tax year. The number of savers caught out rose sharply to more than 2,400 in 2016-17, the last tax year for which figures are available. That’s a 50% rise on the previous tax year. These savers collectively paid £110m in extra tax – in contrast, in 2011-12, just 360 savers had to pay the tax.
The LTA is now scheduled to rise in line with inflation each year, although clearly there is no guarantee that this will continue – a future government could slash it, scrap it, or replace it with something else. Moreover, the figures are likely to significantly understate the scale of pension savers’ exposure to the problem, since the tax is only payable on excess pension savings at the time the saver begins drawing pension benefits on retirement.
Tax tip of the week
Landlords can save on stamp duty by taking advantage of a little-known loophole that involves buying several properties at the same time, says Adam Williams in The Daily Telegraph. If you buy six or more properties in one go, the transaction will be considered “non-residential” for tax purposes. (This is the exemption that applied when Health Secretary Jeremy Hunt, pictured, bought seven flats in Southampton earlier this year.)
For transactions that involve six or more properties, stamp duty is charged at 0% for the first £150,000 of the entire transaction amount, 2% between £150,001 and £250,000, and 5% for anything above this. This compares favourably with the usual tax a landlord would be charged, where the marginal rate is as high as 15% on properties worth £1.5m or more. If buying multiple properties, check to see whether this, or multiple dwellings relief, would save more money.
Compensation cap may be unlawful
Limits on payouts from the UK’s Pension Protection Fund (PPF) are unlawful, according to advice given to the European Court of Justice (ECJ) – paving the way for a ruling that could force reforms of the lifeboat fund’s compensation rules.
Caps on compensation were likely to be a breach of European law if they resulted in a saver losing more than 50% of benefits previously promised to them, the Advocate General for the ECJ warned last week. It could mean the government has to change the rules of the PPF, set up to fund compensation payments for members of final-salary pension schemes whose employers go out of business, leaving insufficient funds to pay pensions. Under the current rules, while most savers get almost all their benefits protected, higher earners can lose out because compensation for those yet to retire is capped at a maximum annual pension of £35,000.
In the case being considered by the ECJ, this rule resulted in a 67% loss of benefits for the member of one occupational pension scheme now covered by the PPF. This was clearly illegal, says the Advocate General, which advises the ECJ on how to interpret European laws.
The court is not bound to follow the Advocate General’s advice, and will issue a final ruling in the next few months. If it agrees, the PPF would have to apply the cap to future calculations, and may have to look at past payments to make sure they are lawful. As many as 500 members of defunct pension schemes may already have lost out.