The provider says over 55s accessing ad hoc lump sums without moving into drawdown or buy an annuity could end up paying more tax than intended because only a quarter of the withdrawal will be tax free. This is because employees using UFPLS will not be able to access their tax-free cash and leave the rest of their pension fund invested. Each withdrawal is regarded as 25 per cent tax-free cash and 75 per cent taxed income.
Further, any individual accessing cash through the UFPLS rules will also see their annual allowance fall from £40,000 to £10,000.
Standard also warn that if employers and trustees only offer workplace schemes with the UFPLS option, employees may unwittingly assume it is the best approach for them, effectively choosing it as the default approach without understanding that other options may better suit their needs.
The provider also points out that while the FCA has already established strict rules around providing advice on the income drawdown process to ensure employees understand drawdown risks, accessing funds through UFPLS is yet to be regulated by either the FCA or the Pensions Regulator, leaving employees unprotected. By using UFPLS to withdraw from their schemes, employees run the risk of depleting their pension pots without realising it, says Standard.
Standard Life head of customer income solutions Alastair Black says: “While the Government’s pension reforms are greatly expanding the retirement options available to employees, this latest uncrystallised funds pension lump sum option is not a panacea for all of their savings needs.
“Employers and trustees expose themselves to potential reputational and conduct risks.
“Employers, pension providers and advisers all have a responsibility to ensure employees get the right guidance and that risks are clearly identified when members withdraw funds from their pension pots. People should not be encouraged to make decisions which might not be right for them and employers who offer schemes with only UFPLS as an option for employees to take an income from their pension could do that.”