Where are we now?
Three years on from the dawn of Pension Freedoms in the UK, how have the biggest changes in nearly a century panned out?
When chancellor George Osborne used his Budget 2014 speech to announce that “no one will have to buy an annuity”, he took much of the nation by surprise. The reforms he went on to introduce have given pension savers unprecedented access to their retirement benefits.
Strict rules on what people could do with their pension savings prior to April 2015 meant that many were left with little option than to convert those savings into an annuity at retirement.
Today, everyone over the age of 55 is free to choose how and when to take benefits from their defined contribution pension, whether that's taking the whole fund at once, withdrawing lump sums, or receiving a regular income.
Initially, there were fears that giving the over-55s unfettered access to their pension savings would lead to reckless spending. Yet, the evidence is that most people are using their increased flexibility in a sensible way, with just one in ten admitting to overspending since the new rules were introduced.1
But with the availability of almost three years’ worth of data and insight into consumer behaviour, it’s clear that people are changing how and when they take benefits from their pension. Many are taking their pots earlier than 65, and drawdown has become much more popular than annuities. Data from the Financial Conduct Authority for the latest period (April to September 2017) shows that drawdown sales have continued to increase – up 17% compared to the same period in the previous year.2
In spite of these trends, knowledge, understanding and engagement remain insufficient and potentially costly. A third of defined contribution pension holders do not know the size of their pension savings; 53% have not reviewed how much their pension pot is worth in the last 12 months; and just under half do not give their pension much thought until they are two years from retirement.3
Financial Conduct Authority data also reveals a staggering increase in the number of pension savers who are going without financial advice. Before the freedoms 5% of drawdown was bought without advice compared to 30% today.4
“People could run out of money in retirement if they are poorly informed about the risks of drawing a flexible income from their pension. Unfortunately, we may not see the impact of this for years or even decades to come,” says Ian Price, divisional director at St. James’s Place.
While many of these were relatively small pensions (under £30,000), the Financial Conduct Authority’s figures show that over half of all pots accessed since April 2015 have been fully withdrawn. In 52% of cases, the money was not spent but moved into ISAs, savings or other investments, possibly to draw down or keep as a safety net. This is leading to concerns that people could be paying too much tax, missing out on investment growth or losing out on other benefits.
The cost of freedom
So has the ‘freedom and choice’ regime helped encourage people to save more for retirement, or simply created a far more complex pensions landscape?
“It has certainly boosted the appeal of pensions since people can get their hands on their money earlier – and many have done so,” says Price. “Freedom for people to use their pension savings how they like has encouraged them to take a greater interest in retirement planning and to save more.”
Indeed, new data from Prudential shows that more people have started saving into a pension for the first time, encouraged their partner to save more, increased pension contributions or restarted pension saving since the rules came into effect.5
However, there is little doubt that the pension freedoms legislation has served to make the decision on when and how to retire even more complex.
“People now face a range of difficult financial choices at retirement. They are expected to make their own decisions about how to fund their retirement and to understand the impact of their investment and withdrawal decisions.”
“There is still a great deal that needs to be done to help those approaching retirement understand not only their choices, but the personal implications of those choices throughout their retirement years,” he says.
The value of an investment with St. James’s Place will be directly linked to the performance of the funds selected and may fall as well as rise. You may get back less than the amount invested.
The levels and bases of taxation, and reliefs from taxation, can change at any time and are generally dependent on individual circumstances.
1 https://www.pru.co.uk/press-centre/cautious-approach-to-pension-freedoms, 20 April 2018
2,3 Financial Conduct Authority, Data Bulletin: Issue 12 – March 2018
4 Financial Conduct Authority, Retirement Outcomes Review, September 2017
5 https://www.pru.co.uk/press-centre/pension-freedoms-encourage-over-55s-to-save-more-for-retirement, 8 April 2018