The way pensions are accessed at the beginning of retirement has changed since the introduction of Pension Freedoms in 2015. The reforms mean that those aged 55 and over are less restricted in their ability to access their retirement fund.
These options mean that those nearing pension age have been faced with a range of options and decisions, which have affected the pensions landscape both positively and negatively.
The four main changes to take place at the point of retirement are:
1. Cash is accessed differently
Since the reforms were introduced, more than half (55%) of pots accessed have been withdrawn in full, but less than a fifth (17%) of those who have accessed their pension say they have taken the full amount. Either way, more people are choosing to take all their retirement income in one transaction, simply because they can.
Withdrawing the full amount becomes more likely for people who have smaller pension funds, as 88% of those which are fully withdrawn held less than £30,000. (Source: Financial Conduct Authority (FCA))
2. Drawdown has increased in popularity
Studies have shown that 30% of pension funds accessed since 2015 have used Flexi-access Drawdown while just 12% have been used to purchase an Annuity. Sales of Annuities fell by 16% in 2017 (source: FCA). Flexi-access Drawdown is not necessarily the wrong way to access retirement income, but it does come with opportunities and threats which mean that your capital will need to be managed more carefully than would be the case with an Annuity.
The ability to take large lump sums from your pension, may seem tempting, but it is important to keep the golden rule in mind: just because you can, doesn’t necessarily mean that you should. Entering Flexi-Access Drawdown offers more flexible access to your retirement income than an Annuity, but it also brings an increased risk of spending too much, too soon and running out of money in later life. It also increases the amount of tax that you may inadvertently hand over to HMRC!
3. Pensioner uncertainty has increased
In 2017, Prudential reported that two thirds (67%) of over 55s were confused or uncertain about what Pension Freedoms means for them; even though two years had passed since the reforms. The same report showed a severe lack of understanding of the new pension rules with many in the dark about:
- No longer having to buy an Annuity (42%)
- Potential taxation of income taken from pensions (52%)
- Being able to access the whole fund from 55 (53%)
- Transferring Workplace Pensions into a Personal Pension fund (70%)
- Potentially needing to complete a self-assessment tax form in retirement (73%)
- Leaving pension funds as inheritance (75%)
Recent research shows that 25% of people do not recall how they accessed their pension pot, showing that, even now, three years on from the Pension Reforms, there is still an element of uncertainty and lack of engagement among those who are most affected by them.
4. Pension scams have increased
According to research from Aviva, pension cold calls have increased by 2.7 million since the introduction of Pension Freedoms. Between 2014 and 2017, it is estimated that pensioners have lost a total of £43 million to scammers, with each victim losing an average of £15,000 each. (Source: Gov.uk)
Recently, legislation has been introduced which will mean that cold calls relating to pensions are illegal and those carrying them out could be subject to a £500,000 fine. However, this will not stop criminals from targeting pensioners by other means so, post, email and even home visits should be treated with caution.
Remember the golden rule of cold callers: If it sounds too good to be true, it usually is.
Pension Freedoms has opened the door to many possibilities for those reaching pension age. But it has also brought confusion and an opportunity for vulnerable people to be taken advantage of.
For many, the reforms have brought good news and have enabled them to take control of their pensions, whilst choosing how they use their money more flexibly. However, it is always sensible to seek financial advice before making any permanent decisions.
To discuss your retirement planning and the best use of your pension, get in touch.