We have just passed the fifth year anniversary of the introduction of pension freedom.
This led to a significant rise in drawdown business, generally at the expense of annuity business.
The ABI estimated in February this year that over £30bn has been accessed from pensions, with over 350,000 pots fully withdrawn in 2018/19 alone.
They did however have reservations over the level of withdrawals that some customers were making, questioning the sustainability of that income.
They commented that “Full withdrawals have risen to their highest level since the freedoms were introduced: 40 per cent of withdrawals were at an annual rate of 8 per cent and over, which is not sustainable.
"On average, withdrawing 3.5 per cent from a pension pot annually should ensure a 95 per cent chance of not exhausting savings in retirement; but withdrawing 7 per cent only delivers a 60 per cent chance of not running out of money”.
Of course this does not take account of the possibility that people have more than one pot – in which case taking aggressive levels of withdrawals may well have been appropriate, or at least an informed decision.
At least pension freedom has made more people aware that the money in their pension fund is their own money and they have the right to do with it as they want.
That sense of pensions being ‘worthwhile’ can only be a good thing in the long run and hopefully encourage greater saving.
The impact of Covid-19
Of course up until a few weeks ago during the time since pensions freedom was introduced we have enjoyed a bull run in stockmarkets.
Maybe this gave investors more confidence than would otherwise have been the case. Of course after the recent market shocks of Covid-19, that certainly will not be the case now for many.
Here I am talking very specifically about the financial impacts of Covid-19 for those in drawdown. This however is intended to in no way ignore the terrible human cost of Covid-19.
One point worth making from outset is that this is not just an issue which is affecting equity values. Global assets of most types, and thus the funds that invest in them, have fallen significantly in value.
Diversification alone has not sheltered values from falls, though it is true to say some asset types or regions have fallen more than others.
The FCA has provided some helpful information on their website around the impact of Covid-19. https://www.fca.org.uk/firms/information-firms-coronavirus-covid-19-response
Helpfully, the FCA has also deferred some potentially time-consuming items for advisers, for example:
- Deferring the introduction of investment pathways, now expected to come in from February 2021
- Deferring the policy statement in respect of contingent charging for DB transfers to Q2 or Q3
- Rules around pension transfer qualifications have been pushed back to October 2021.
It is important to remember that the suitability review 2020 focusing on retirement income may be deferred because of the current situation, it has not gone away.
The FCA confirmed in its 2020/21 business plan when commenting on consumer investment decisions: “At present we see significant risk of harm in these markets, in part driven by the way consumers have been given additional responsibility for complex investment decisions, through the shift to Defined Contribution (DC) pensions and the Government’s 2015 pension freedoms”.