Since the starting gun was fired on pension freedoms on 6 April, there has been cause for both cheer and concern. Investors might not be clamouring to blow their pots on cars and speedboats, but the workplace pension market appears to be struggling to cope with demand for flexibility and smaller schemes are crying out for help from their larger counterparts.
There is no doubt that customers rushed to the phones in the first days of pension freedoms. Tom McPhail, head of pensions research at Hargreaves Lansdown, says that calls to the DIY investment platform reached into the thousands over the first few days. Pensions company Standard Life took 3,000 calls between 6 and 9 April, while rival Scottish Widows says it received a staggering 12,500 calls between 6 and 10 April. The company was bracing itself for two years of activity in the space of three months, bringing in 404 new members of staff to handle the increased demand.
But those hitting the phones were not all clamouring to cash in their entire pensions. Of the five options now open to pension investors over 55 - doing nothing, taking an annuity, opting for flexible drawdown, taking lump sums from their pots (with the first 25 per cent tax-free) or cashing in everything - the majority appear to be opting for flexible drawdown.
Despite fears that investors would blow their pot immediately on expensive holidays or luxury treats, commentators say that has not been the case. A PwC study found that just 1 per cent of 50-75-year-olds would use the entire pot to treat themselves and 45 per cent were interested in a drawdown product.
"Drawdown has been the most popular option by some margin," says Mr McPhail. "The bulk of enquiries have been about that and then a long way behind has been the lump sum option." Although at least one customer has registered an interest in cashing in a six-figure sum, he says that does not seem to be the norm.
"In the main, where people are taking out lump sums it is part of a coherent financial plan where they have other incomes that they can rely on and are still intending to secure a regular retirement income," he says.
David Smith, a financial planner at Tilney Bestinvest, says: "People who have saved diligently across their lives for the moment of retirement do not transform into reckless hedonists at the point of retirement.
"It's been flexible drawdown that people want. We haven't seen any huge withdrawals using the uncrystallised funds pension lump sums (UFPLUS) option and there has been no increase in annuity take-up."
However, Mr Smith says he is concerned by investors unaware of the tax hit they face if they choose to take cash from their pot as a lump sum. Although the first 25 per cent of a lump sum is tax-free, everything after that will be taxed as income.
"Everything revolves around what the options are at retirement, but there isn't much education around the tax implications," he says.
Panic stations for employers?
Although investor behaviour isn't quite the nightmare scenario many were imagining, providers' ability to cope or deliver the new flexibilities, particularly when it comes to workplace schemes, is a cause for concern.
According to Mr McPhail, smaller pension providers have found themselves unable to process all requests and have asked Hargreaves if it will process the administration for those customers wanting to cash in pots or take small sums down but remain in a scheme.
There is also the issue that many employers also do not have the resources and systems in place to offer the range of options launched on 6 April, meaning employees are having to switch to other providers. Defined-contribution schemes do not have to offer the new flexibilities and many will choose not to, creating a gap between employee expectations and their reality.
Mr McPhail says: "Most occupational schemes cannot offer the full flexibility at the moment. Many have a system in place to cash out pots in one go because of old Trivial Commutation rules (in which those with pots of under £30,000 could take out their entire pension pots in many cases).
"But the bit they find really challenging is when members want to stay members but just take small amounts in a lump sum."
Many people coming up for retirement assumed they would be able to remain in their current workplace scheme and draw income from it in old age, but are being told to move money elsewhere. However, moving could raise further issues, including around contributions to the pension pot in the case of auto enrolment.
Mr Smith says: "In the case of a contract-based provider (for example a defined-contribution pension scheme) let's say the employer has a scheme with X provider which they use for auto-enrolment and then 58-year-old Jimmy Smith decides to take all his money out. The employer has to keep paying money in but the policy has been closed because Jimmy has taken all money out. How does the provider handle that?"
Tax boon on big lump sums
Financial advisers had been worried that anyone cashing in their pots would face a mammoth emergency tax bill on the cash, for example a £12,000 lump sum taken out in April could have been taxed as if you were earning £144,000 a year. However, the beginning of the year brought a boon. The tax authorities have made it easier for savers to reclaim tax they may have overpaid after taking a lump sum from their pot under the new freedoms.
Previously savers would have been hit with the emergency rate tax unless they provided providers with a P45 form, usually only issued when people stop working or are no longer claiming Job Seekers Allowance.
But even with the form, the refund on tax paid could take until the end of the tax year. From 10 April, HMRC introduced new forms allowing people to reclaim overpaid tax within five working weeks of receipt of the request.
Individuals now have the choice of three different tax forms depending on their circumstances - a P5OZ if they have no other income, a P53Z if they have other taxable income in the tax year, or P55 if they have taken a pension flexibility payment that does not use up all of the fund.
