Pension freedoms sounded incredible.
So incredible that when they were first mooted, there were concerns about pensioners releasing their funds to buy dream cars or blow the lot on exotic holidays, wine, women and song. The rest, presumably, they would just squander.
Since the pension freedoms came into being on April 6, 60,000 people aged over 55 have accessed pension savings, withdrawing more than £1bn collectively according to figures from the chancellor George Osborne out last week.
This gives an average withdrawal of around £16,666 – hardly enough to put a deposit on a supercar, but certainly enough for a decent holiday.
Digging deeper into the figures, however, shows that pensioners are being more sensible than some politicians and financial experts had given them credit for.
Tom McPhail of Hargreaves Lansdown said that for most investors, this money has been taken by drawing income from their pensions rather than buying an annuity. Given there are 12 months in the year, that £16,666 would be equivalent to £1,389 a month. Not bad, but hardly the last of the big spenders.
Aegon has done its own research into what pensioners plan to do with their money, with less than one in 10 planning to buy a new car with their tax-free lump sum. Instead, two fifths are aiming to invest in a cash Isa and a fifth investing in a stocks and shares Isa.
The government is hailing the 60,000 figure as proof that this pension freedom legislation is a “success”, yet Old Mutual is critical of that measure, since 60,000 people accessing their pension since April is a relatively blunt expression of whether or not it is a good thing or a bad thing.
The government is hailing the 60,000 figure as proof that this pension freedom legislation is a “success”For example, it gives no indication as to how many people knew what they were doing when they chose to access their money, had done so in the most tax-efficient way, or even without the help of fraudsters keen to get their hands on the loot.
The controversial – and frankly insulting to advisers – decision to offer the Pension Wise service as a source of basic information with which to allow over-55s to make pension withdrawal choices does not clear things up either.
So far, the government has not released figures on how well this service has been taken up, according to Old Mutual. Yet its own figures suggest very few pensioners are using this service, leaving them potentially to make their decisions alone if they are not talking – as they should be – to a financial adviser.
While these are all interesting points, there is a real danger here that changing the rules has resulted in a removal of protections that had been in place prior to April 6.
The current reporting requirements mean that the mortgage market must report on more than 100 separate data fields, which is more than 10 times the number of fields required for pensions – and that includes the provider’s name, adviser registration numbers and the customer’s date of birth, according to Just Retirement.
Little wonder then that the House of Lords had a debate on this issue last week, where Lord Bradley asked what measures are in place to monitor fraud. It seems that more extensive data needs to be gathered to protect those looking to take their pension money out before it is too late.
But there is potentially a bigger pickpocket in the pensioners’ midst than the fraudsters, and that is the taxman. Old Mutual has calculated that a minimum of £72.8m has been paid in tax on the money already withdrawn since April 6, based on pensioners having no other taxable income, which is unlikely given state pension payments and other income from, say, savings.
So, this conservative figure would give the government £436m in tax in this tax year, nearly a third higher than the £320m it estimated it would receive from flexible pension withdrawals. Increasing the government’s potential tax take by so much is no mean feat, and it is likely to be exacerbated by a lack of advice on the best way to deal with the taxation of their pension if they decide to release money from their pot.
An adviser will be able to help with this, suggesting ways to mitigate tax, specifically use up tax allowances, or even slow down withdrawals to prevent a situation where pensioners tip over from the 20 per cent to 40 per cent tax bracket unwittingly. They will also be able to take into account other types of investments, sources of income, and additional tax-efficient investments such as Isas as a means of giving them the income they need at the time, without causing more of their money to end up in the Treasury coffers.
There is also the consideration of exit fees that some providers are charging for those who want to leave or move their pension schemes to benefit from freedoms they do not offer. The government has announced a consultation on the issue, which could lead to a cap on charges providers impose on pension savers looking to access the new freedoms.
The Association of British Insurers said nine in 10 people would not suffer these costs in any case. But that is no comfort if you are one of the one in 10 who do.
No matter what the outcome of the review, the sensible decision for pensioners looking to access their money is to take advice. Going it alone could prove a costly mistake.
Alison Steed is a freelance journalist