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What is the background to the pension freedoms?

This article is part of
Guide to how the pension freedoms have changed the pensions landscape

What is the background to the pension freedoms?

The background to the overhaul of the pensions industry, which has come to be known as pension freedoms, was the perception the market for retirement was not working properly.

That is according to Peter Bradshaw, national accounts director at Selectapension. 

At the same time, annuities were not looked on quite as favourably as they once had been.

He recalls by the time then-chancellor George Osborne made his Budget announcement about removing the need for every retiree to buy an annuity, the annuities market was seen to represent poor value.

“If you went back 20 years ago, an annuity was quite a good thing to have,” he remembers.

So what had changed in that time?

Fiona Tait, technical director at Intelligent Pensions, explains: “For a number of well documented reasons, the income available from annuities was falling and people were being put off pension saving by the fact that they couldn’t access their money without taking all of their income at once. 

“Income drawdown was introduced in 1995 to address this problem. However, due to the associated investment risks the majority of retirees were still likely to end up with an annuity.”

Bernadette Lewis, financial planning manager at Scottish Widows, recalls: “Before the reforms, alternatives to annuity purchase included capped drawdown, or flexible drawdown for those with secure pension income of at least £20,000 a year (reduced to £12,000 a year for new declarations from 27 March 2014)."

"But these forms of drawdown weren’t generally suitable for the majority with relatively low levels of DC pension savings. That left annuities as the possibly unsatisfactory solution for those with too much to qualify for a trivial commutation lump sum, but too little to fund a worthwhile retirement income."

Gareth James, head of technical resources at AJ Bell, agrees the purchase of an annuity had become the norm.

“For most, the retirement saving landscape used to involve building up a pension until they hit their 65th birthday and then handing over their pension pot to an insurance company to provide an annuity for life,” he says. 

“A fall in the income available from annuities in the years before the freedoms had tarnished their image, with the belief that they were the only option available to savers and offered poor value for money.”

Prior to April 2015 when the concept of pension freedoms was introduced, all those with pension pots under a certain size were “frozen out” of the drawdown market, recalls Neil Adams, pensions and investments expert at Drewberry.

While those with pension pots sizeable enough for drawdown were still required to purchase an annuity at the age of 75, he notes.

Political move

The retirement market appeared to be inflexible and wanted everyone, regardless of circumstance and wealth, to conform to the annuity model.