Pensions are always prime territory for tweaking by politicians but in the March 2014 Budget many were surprised by the extent of the pension freedoms announced by chancellor George Osborne.
These included the removal of the requirement to annuitise a pension pot, and the ability to take an entire pension pot as cash, subject to the person’s marginal rate of income tax rather than the previous 55 per cent tax charge.
Twelve months on since these measures came into effect in April 2015, how have they affected the pension and investment landscape?
One of the initial trends in the investment space was the increasing number of multi-asset income funds looking to target retirees who wanted their pension pot to remain invested and take drawdown.
Figures from the Association of British Insurers (ABI) showed that in the first nine months since the reforms were enacted, £3bn of pension money had been paid out in cash lump sum payments, although it points out this equates to average payments of £15,000.
The research suggests larger retirement pots are being used to generate regular retirement income, with almost £7.5bn having been invested to buy products such as annuities or income drawdown.
| EXPERT VIEW - Pension Freedoms - 12 months on |
Dr Yvonne Braun, ABI’s director of policy for long-term savings and protection, says: “One year on from the pension reforms, the freedoms are settling in and working as intended. Following some initial pent-up demand, the number of people accessing their pension pot as cash in one go has settled down. People are taking a sensible approach. “Annuity sales are beginning to see a revival, with more annuities than drawdown products sold in the last quarter. This shows people still really value a lifelong guaranteed income. Our key challenge remains ensuring people save enough for their retirement.” |
Andrew Pennie, head of pathways at Intelligent Pensions, says the pension freedoms have “helped to break the previous retirement model where people were shoe-horned into annuities without due consideration of the alternatives”.
He points out: “Less than 20 per cent of people now buy an annuity compared to approximately 80 per cent pre-pension freedoms. [The changes] have helped improve engagement and awareness. They have helped people with small pots access their savings rather than having to buy a relatively small income.”
That said, Mr Pennie notes there are some downsides to the reforms. “Some people are making poor retirement income decisions and choosing the wrong strategy. Some are investing in drawdown who simply don’t have the appetite for, or are not in a position to, take on the required risk.
“Conversely, some have bought annuities who could have benefited from flexibility and opportunity of drawdown. Fortunately, not as many are fully cashing-out their pension as many had originally feared.”
In addition, he says figures show people are shopping around less and not making use of the government guidance, suggesting they either don’t value it or are unaware of the service.
“People are investing inappropriately, which could result in financial loss. Many are on glidepaths that don’t reflect the actual retirement income strategy they are looking to use. In particular, many are still in default funds predicated on buying an annuity (lifestyling or target date) but have no intention of buying an annuity,” he warns.
“Guidance alone isn’t working. People have more choice but with that comes more risk and complexity – people need more support to get the best retirement outcome and regulated financial advice needs to be a key part of that solution.”
| Pension Flexibility - What is it? |
HM Revenue & Customs issued a guidance note in February 2015 to explain some of the pension changes. It stated: From 6 April 2015, from age 55, you can access as much of your defined contributions pension savings as you wish. There will be three main options but you can also choose any combination of these. Lifetime annuity As you can now, you will be able to use some or all of your funds to buy an annuity which will be payable at least for the rest of your life. When you buy an annuity, you can take a tax-free lump sum of up to 25 per cent of your pension pot at the same time. Flexi-access drawdown As you can now, you will be able to put funds into drawdown. From April 6 2015 there will be no limits on how much or how little you can take from your drawdown fund each year. When you put funds into drawdown you can take a tax-free lump sum of up to 25 per cent of your pension pot at the same time. Lump sum payment From April 6 2015 you can take money direct from your pension pot without having to buy an annuity or put the money into drawdown, and 25 per cent of this sum will be tax free. This is called an uncrystallised funds pension lump sum (UFPLS). |
Vince Smith-Hughes, retirement expert at Prudential, notes the reforms were some of the biggest industry changes in a generation but, while effort has been made to educate people, “more could have been done at the outset to underline that people can withdraw funds gradually”.
He adds: “The possibility of ongoing fine-tuning is high. We are likely to see some future changes to the relationship between pensions and Isas, with all the signs of a future potential merger between the two. In fact, we could be seeing this already with recently increasing annual Isa limits.”
But while many retirees have taken advantage of the reforms in a sensible manner, with plans to change the taxation of pensions abandoned before this year’s Budget, Greg Kingston, head of communications, product and insight at Suffolk Life, warns against further pensions tinkering.
“The government has delivered great pension flexibility – now it needs to deliver consistency and stability to ensure that tomorrow’s pensioners can save with certainty that the rules won’t be changed again before they retire.”
Instead Mr Pennie adds: “While a ‘one size fits all’ solution can work for an annuity purchase or cash-out, it simply does not work for people looking to use drawdown or combination options – everybody’s retirement will be different and a more personalised approach is needed. There is still too much focus on the point of taking benefits – decisions need to be made earlier.”
Nyree Stewart is features editor at Investment Adviser
