Pensions Freedom in Retirement

“One million pensions have been accessed under 2015’s radical retirement overhaul”

Pension freedomPension freedom was introduced in the April 2015 budget, with the political spin being for “freedom and choice in pensions”. It meant that anyone aged 55 and over could take the whole amount of their defined contribution pensions as a lump sum, paying no tax on the first 25% and the rest taxed at their own salary income tax rate.  

Since the introduction:

  • 1 million pensions have been accessed under the freedoms
  • 72% of pots have been accessed by under 65s
  • 53% of pots accessed were fully withdrawn
  • 90% of fully withdrawn pots were smaller than £30,000
  • Twice as many pots move into drawdown than annuities – before the freedoms were introduced, 90% of pension pots moved into annuities.

Traditionally people would buy an annuity with their pension savings and the annuity would pay a guaranteed income for the rest of their life. Annuity numbers have hugely decreased since pension freedom was introduced.

What are your options?

For example if you have a £ 100,000 pension pot, you can take up to £ 25,000 (25%) as a tax-free lump sum, your following options:

  • Take out the remaining £ 75,000 immediately, or in lump sums, and pay income tax at your marginal rate – 20%, 40% or 45%.
  • Buy an annuity with the £ 75,000.
  • Leave the £ 75,000 invested in the stock market and ‘draw down’ as much or as little as you want in income.
  • Buy an annuity with part of your savings, leave the rest invested, or take it out your fund and spend it.

4 things to consider if choosing Pension Freedom

  1. Pension savings are being placed into poor-paying cash savings. It’s believed a third of pensions that have been withdrawn in full were only moved into a savings or current accounts. This can be risky considering savings accounts earn very low interest rates and if the money was not needed it would be better to let it remain invested to give further growth potential.
  2. Retirees aren’t shopping around for drawdown plans. Many people who access their money early tend to take the plan offered by their pension company. Without realising they could end up paying higher charges as there is little competitive pressure.
  3. The FCA is worried that people choose drawdown without advice. An FCA report shows a large increase in people taking their pension without seeking any financial advice. 5% before pension freedom was introduced, compared to 30% since. Whilst drawdown may be appropriate there may be other types of plans that are more suitable, that are known to advisers but not particularly the general public.
  4. The annuity market is getting smaller. Although drawdown gives people more flexibility when taking their pension and has become increasing popular since 2015, annuities can still be a good option for people. Giving a guaranteed income for life can be more comforting to people who are concerned about running out of money. Also an enhanced annuity, due to lifestyle or health conditions, may offer a far better return than drawdown options. This is where advice can again be so important.

 

If you have any queries or questions about Pensions Freedom, leave us a comment or contact us here.

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