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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

For those who do not opt to annuitise, many in the industry are concerned there are risks.

In the wrong hands, more choice is not necessarily a good thing.

Stephen Lowe, group communications director at Just, acknowledges: “Since the changes, many more people aged 55 and over have chosen to take money directly from their pension funds, either emptying the pension or leaving some invested in the hope of future gains. 

“The reforms give people more flexibility but potentially introduce more risks and costs. 

“The FCA has called accessing pensions early ‘the new norm’, with seven in 10 (72 per cent) aged under 65 and most choosing to take lump sums rather than regular income. Around half of fully withdrawn pots are put into savings or investments.”

But he warns: “The FCA said ‘this can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits’.”

Ms Lewis points out one of the complexities brought about by the freedoms is the Money Purchase Annual Allowance (MPAA).

"The MPAA is an intentional complication introduced along with the reforms in 2015-2016. It was originally £10,000 a tax year but reduced to £4,000 from 2017-2018," she notes. 

"The MPAA restricts DC contributions for all those who’ve flexibly accessed pension income, as an annual allowance charge applies to any excess. The MPAA doesn’t apply to DB schemes, leading to complex calculations for affected active members of both DB and DC schemes."

She cautions that the MPAA restricts tax planning opportunities, explaining: "The MPAA creates traps for those who reject advice or guidance, as taking uncrystallised funds pension lump sums (UFPLS) automatically triggers it, while crystallising via flexi-access drawdown and taking just the tax-free cash does not.

"Some over 55s who’ve used a UFPLS to repay debts are finding the now £4,000 MPAA leaves them unable to rebuild their pension savings as anticipated."

Three years on from Mr Osborne’s announcement and the industry is still trying to resolve the issue around encouraging people to sit up and take notice of their pension.

As Mr James puts it, a need for greater engagement with pensions “is positive for those who are engaged, but has introduced risks for those without the desire or knowledge to engage”.