How pension freedoms have affected company pensions

This article is part of
Guide to Workplace Pensions

How pension freedoms have affected company pensions

When pensions freedoms were introduced in the 2015-16 tax year, they gave people the opportunity to do things differently.

One of the freedoms that piqued people’s interest was the new option of taking the whole amount of their pension as a lump sum, if over the age of 55.   

Some people then started to view their company pensions (and pensions in general) in a new light.

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Something that they had previously given little thought to, now looked like a way to deal with debt or pay for a holiday.

They might even buy a Lamborghini, as the then pensions minister, Steve Webb pointed out.

Private pension landscape in the UKDefined benefitHybrid: mixed benefitHybrid: dual sectionDC: trustDC: workplace contract
Open Schemes6802035024,1001,630
Total memberships6,684,000963,0004,788,00018,171,000N/A
Total active members631,000235,0001,038,0009,275,0005,347,000

Source: The Pensions Regulator

Employees with a defined (DB) company pension, started to think about transferring it, to be able to access what in some cases could be a considerable sum of money.  

Cashing in this lump sum became a popular choice for the over 55s.

Only a year or so after the introduction of pension freedoms, the FCA announced that accessing pensions early had become the “new norm” – with the most popular option to withdraw the whole lot.

Things seem to have settled down a little now, though, according to Helen Morrissey, pensions specialist at Royal London, who says: “Data shows that average amounts being taken from pensions is starting to go down, which is a positive.”

Taking control

It can be tempting to cash in the lump sum, but it has its pitfalls, as wealth adviser, Anna Sofat, associate director at Progeny Wealth points out.

“Some people have not thought it through sufficiently and the result is that they have been hammered by tax, which could have been avoided.

"Also, some advisers have seen it as an opportunity to target the vulnerable and the regulation has not been strong enough to protect these people.”

Ross Leckridge, financial planner and associate director at Johnston Carmichael agrees that some people may not be acting in their own best interests, as he observes: “They are aware of the options and benefits of transferring a DB pension, but they’re not so aware of disadvantages and problems.

"They tend to focus on the positive.

“But they’re going from having a cast-iron income for life to having to manage an asset, to ensure it provides them with income for the rest of their life.

"People are just not prepared for this – they’re not fully aware of what’s involved after the pension transfer.”

Adviser Carl Lamb of Almary Green believes that some may be following the ‘herd’: “The mass exodus of people leaving their DB schemes has not been a successful outcome of pensions freedoms.

"Some people have been approaching this like lemmings off a cliff. If they see their colleagues doing it, they want to do it too.”