Freedom Day will boost UFPLS requests as well as income drawdown sales but is the market going to be ready for them?

19 November 2014

Prudential’s third quarter financial results reveal a rapidly changing at-retirement market picture since last April’s dramatic Budget announcements. The Pru’s Income Drawdown (IDD) sales grew by a staggering 128% compared to the same period a year ago. This sort of growth is more than offsetting annuity sales losses which fell 47% during the same period.

Such is the demand for income drawdown policies that Standard Life predicted a five-fold increase in demand for income drawdown from next April, resulting in an administrative capacity crunch hitting platforms which are hard-focused right now on completing clean share class conversion work.

The capacity crunch may be exasperated by the fact that providers and platforms alike are already fighting a charges price war as they move to halve or even scrap fees associated with drawdown policy administration. They need to streamline and automate administrative processes associated with drawdown fast if they are to avoid running IDD business at a loss in their race to grab market share. Our guess is that consumers considering or already in drawdown are also going to want to review their pots much more regularly than they do today, to consider whether they need to adjust the amounts they are withdrawing. Eventually secure online portal viewing and transacting will need to be offered, we believe.

But Freedom Day on 6th April 2015 is not just going to be a bonanza for drawdown providers. There is a dark horse in the room post F-day in the shape of Uncrystallised Funds Pension Lump Sums (UFPLS) withdrawals. We believe that the ability to take UFPLSs may well also prove very popular. The only question is whether enough advisers know enough about it and whether providers and platforms will be ready to process these withdrawal requests efficiently, accurately and in a timely manner post F-Day when they go live.

UFPLS is a compelling idea for the consumer approaching retirement and over the age of 55. In this new arrangement, DC policy holders will be able to withdraw funds without crystallising their pension. In short, they can carry on paying into their existing DC personal pension without purchasing an annuity or drawdown. Admittedly, if they exercise this option the amount they are allowed to pay in tax-free in any given year falls to £10,000 but there are no other downsides. UFPLS also seems like a great way for the providers which don’t offer drawdown policies today to seek to retain pension policy assets under management.

But the administration of UFPLS withdrawal requests, at first glance, looks complicated. The tax rules for UFPLS were first published in the Draft Taxation of Pensions Bill, published on 6th August 2014 and updated further last month. The imminent legislation reveals some complexities. For example, any UFPLS withdrawal must be treated as Benefit Crystallisation Event (BCE) which requires a Life Time Allowance (LTA) test to be conducted and an up-to date valuation of the scheme-holders portfolio to be calculated. In other words these lump sum withdrawals need to be deducted from the LTA which is now fixed at £1.25m (unless protected at the pre-April 2014 level of £1.5m).

In addition, there is an impact in terms of Tax Free Cash as 25% of the lump sum taken under this new arrangement will be tax-free provided payments into the uncrystallised policy do not exceed the Money Purchase Annual Allowance (MPAA) which is being reduced from £40,000 to £10,000, also effective on 6th April 2015. So any tax benefit from UFPLS withdrawals must be based on total contributions of no more than £10,000. Non-tax free money will need to be routed via existing payroll systems.

Despite this complexity, we are already seeing strong demand for our new UFPLS processing module which we are adding to our Imago Back Office pensions administration suite. We’ve designed the module so that new Imago users can just pay for and switch on the UFPLS functionality if that is all they want. Existing Imago Back Office license holders will of course gain access to it as an extension of the administrative capability we are already offering them.

But we think UFPLS is a major opportunity for pre-retirement players to extend their engagement with policy-holders much deeper into their retirement years. It’s becoming a fact that annuities, if they are bought at all post F-Day, will be purchased much deeper into retirement when annuity rates will favour purchase. New guaranteed income products will no doubt cannibalise more of annuities market away but we believe flexible offerings such as UFPLS offer real opportunities for more providers to enter the burgeoning at-, or should we now say, in-retirement market.

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