The past year has flown by. In April 2015, chancellor George Osborne introduced new rules allowing retirees greater flexibility over what they can do with their pension pots.
The rules allow people to withdraw their entire pension from age 55, with the first 25 per cent tax free and the remaining 75 per cent taxed at the saver’s marginal rate.
What followed was a lot of excitement in the pensions market, but also confusion among advisers and the general public on how the new rules would impact, and an increasing concern that people might end up blowing all their savings. However, the legislation has been welcomed by many.
According to Legal & General Investment Management (LGIM), between 6 April 2015 and the end of January 2015, it issued more than 20,000 quotes in total and settled more than 13,000 payment requests. Roughly 85 per cent of these were in relation to payment of a cash amount – either part withdrawal or lump sum, 10 per cent chose drawdown and 5 per cent chose an annuity. About 90 per cent of all cases settled included amounts below £30,000.
“That explains why we have seen so many that have been taken as cash,” says Emma Douglas, head of DC solutions at LGIM. “The amounts involved have not been that high because defined contribution (DC) is only a part of someone’s total retirement wealth. Hopefully, the generations that are coming up now have got some defined benefits (DB) in the background as well.”
However, with just 5 per cent opting for an annuity, the question arises whether this is the end for an annuity market? “Not at all,” says Steve Webb, former pensions minister and now director of policy and external communications at Royal London. “I would say we were as a nation probably buying annuities too soon. I don’t think there is anything wrong with an annuity for the right person. Annuities still have a place, but I think probably more people will buy them later.”
The size of the average pension pot is concerning for the government since it is not enough to sustain people. This is one of the reasons why more and more people are continuing to work post-retirement. Chart 1 highlights reasons for people staying in work.
General consensus
While the introduction was tough due to confusion over the reforms, the legislation has since grown slightly in popularity. It has brought new meaning to the term ‘pensions’ and made retirement a topic for discussion in conference room meetings, pubs, around dinner tables and between friends.
A total 120,688 consumers accessed some sort of cash withdrawal within three months of the start of the freedoms