Platforms could arguably be the biggest winners from the last two Budget statements. But although changes around pensions are creating significant opportunities for platforms, they have a lot of work to do to make sure they get it right and keep clients – and their advisers – happy.
Few predicted the pension freedoms promised in the 2014 Budget or their repercussions within the financial services industry as a whole.
However, a year on and platforms have emerged as one of the main beneficiaries of the regulatory changes. Platform flows rose to record highs in the fourth quarter of 2014, largely thanks to sales of pension products, according to the Fundscape Platform Report.
With the promise of being able to access their money more freely from this month, it seems that more people are now happier to save for their retirement through pension products.
And with £343.7bn of investments held on platforms, according to the report, the facilities have a central role to play in providing individuals and their advisers with easy, flexible, low-cost access to investments and the administration of portfolios.
But the picture isn’t completely rosy for platforms. The timescale between the announcement of the pension freedoms in March 2014 and their introduction in April 2015 has left a relatively short period to implement the flexibility, creating challenges for all. These include ensuring systems can cope with increased demand for pension drawdowns – potentially from small pots – than was previously the norm and from advised as well as non-advised clients.
Meanwhile, many platforms will be looking at implementing the ISA changes announced in the 2015 Budget, which are due to be introduced this autumn. This flexibility gives savers the ability to withdraw investments and repay in the same tax year without any loss of tax-free status, adding to complexity and cost for platforms catering for such a scenario.
Alongside changes to the flexibility of wrap products, the deadline is also looming to convert all share classes from bundled to unbundled ahead of the sunset clause in April next year.
Recent research by Investment Adviser has found that platform assets held in clean share classes has leapt from roughly 50 per cent in May 2014 to around 75 per cent. While this is positive news, it still leaves a major task for those platforms yet to fully make the transition.
No one knows for sure what the level of activity will be when the pension changes come into force. Many are predicting a spike in demand from individuals wanting to get cash out of their pensions, due to thousands of people recently eligible to draw on their pensions that have delayed doing so.
Unlike the Northern Rock situation seven years ago, we’re not going to see panic queuing in the streets. But given the hype around pension freedoms, customers are likely to have high expectations of how quickly they will be able to get their money out.
Providers need to be attentive to their existing clients’ needs as much as they are to building all the new functionality. The life companies will need to be more flexible around moving older legacy products into new arrangements on their platforms. Attracting new business but at the same time seeing the existing book haemorrhage is not good economics, particularly if the business goes to a competitor.
So although we can expect a surge in platform assets as a result of the new freedoms, it will be interesting to see how much of this is simply ‘recycled’ money from life companies.
This could either be through legacy assets moving internally to the platform or moving externally to a different platform because the life firm is unable to offer full flexibility on legacy assets due to internal barriers stopping transfers.
There is also evidence that at least some pension money will be spent rather than saved, with Saga recently reporting an increase in cruise bookings. So how much will stay within financial services remains to be seen.
Many platforms and other pension providers may have their fingers crossed that they will be ready in time, both in terms of technology and functionality and support to their clients – both investors and advisers.
Those who have been in the industry for more than 20 years will recall the late introduction of accreditation and disclosure and how many – or how few – providers were ready on time. Let’s hope that history does not repeat itself.
Regulatory changes: pension freedoms
In the 2014 Budget, George Osborne unexpectedly announced changes to the existing pension regulations to give retirees more control over their pension pots. These changes were added to in the Autumn Statement in December 2014 and the 2015 Budget.
The changes include:
- Reducing the amount of guaranteed income people need in retirement to access their savings flexibly, down to £12,000 from £20,000.
- Increasing the amount of total pension savings that can be taken as a lump sum, up to £30,000 from £18,000.
- From April 2015, individuals aged 55 and above will be able to access their defined contribution pension savings at their marginal rate of tax, rather than the previous 55 per cent tax charge.
- There is no longer a requirement to purchase an annuity with a pension pot. Annuities are still available, but retirees can also choose to draw down their pension in stages, or to take it all as a lump sum.
- The minimum age for accessing a pension pot will increase from 55 to 57 in 2028.
- People who die before the age of 75 can pass on their unused, defined-contribution pension as a tax-free lump sum to a person of their choice
- Those who die after the age of 75 can pass on the unused pension to a person of their choice, who can take the money as a lump sum taxed at a rate of 45 per cent, or as income taxed at their marginal rate.
From April 2016, the government will remove the restrictions on buying and selling existing annuities to allow pensioners to effectively cash in their annuities – a consultation on the measures needed to implement this market was launched on March 18 2015.