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Wrapped up

06 August 2015

Flexible income options have risen in popularity since the introduction of new pension freedoms.

New figures published by the Association of British Insurers (ABI) have provided an early insight into what people are choosing to do with their retirement savings following April’s radical changes to pensions.

Although it’s early days, predictions that the reforms would lead to more people choosing income drawdown – a pension wrapper where savings are left invested – appear to be well-founded. In 2012, when annuity purchases were at their peak, income drawdown accounted for less than 10% of retirement income solutions. The popularity of income drawdown has now risen to a point where the amount of new money invested exceeds that put towards buying annuities.

The ABI figures show that, in the first two months of the new pension freedoms, savers used £630 million to buy annuities, while £720 million was invested into income drawdown plans.

“We’re only a few months in, but clearly income drawdown is finding favour with people who want to keep their pension fund invested in a flexible wrapper,” commented Steve Moy, wealth management consultant at St. James’s Place, “but annuities still have a role to play, and the figures back this up.”

Cash back

The reforms also allow retirement savers to bypass annuities and income drawdown altogether and dip into their savings by taking cash directly from their fund – an option known as an ‘uncrystallised funds pension lump sum’. This is the alternative income solution Chancellor George Osborne alluded to in his Budget speech in March last year, when he said that savers would be able to use their pension pot “like a bank account”.

Pension savers choosing this method withdrew over £1 billion in April and May, with the size of the average pot being £15,500. Over the same period, payments totalling £800 million were taken via income drawdown through 170,000 withdrawals.

Sensible seniors

The ABI says the figures show that those with smaller pension pots are those typically cashing out, whilst those with more substantial pots are using the accumulated funds to buy an income which, Moy says, is the responsible approach. “Given the tax implications of withdrawing large amounts, it’s encouraging to see that it is mostly smaller pots being taken as lump sums,” adds Moy. “In reality, smaller pots will not provide much of a significant income boost over the course of retirement, so it makes sense for many people to use their funds in other ways.”

However, Moy cautions that some people are still making bad decisions. “I agree that people should be trusted with their own money, but there are hidden dangers when drawing down a pension – especially in terms of Income Tax liability and the annual allowance. These are irreversible decisions and vitally important to get right, so people should always seek advice first.”

The levels and bases of taxation and reliefs from taxation can change at any time. The value of any tax relief depends on individual circumstances.
 

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