Pension Freedom  

Pension freedoms: were they really a good idea?

Pension freedoms: were they really a good idea?

Pension freedoms can divide opinion. While they can be appreciated by those looking to spark investments, they can cause anxiety in others who struggle to know exactly what to do with their pot, worried they could be making a potentially catastrophic mistake.

While this new found freedom felt glorious in the early days, savers found this liberation came with difficult decisions, which many people were not equipped to make and help from government and regulators was simply not up to scratch.

When these radical pension freedoms were first unveiled by then-chancellor George Osborne in Budget 2014, it came as a shock to the industry who were otherwise expecting a quiet day.

The pension freedoms legislation, which came into force from April 2015, allowed savers to flexibly access their defined contribution pension from the age of 55 and use the funds for a wider range of options, including cash withdrawal, retirement income products or a combination of the two.

Before, savers looking to retire only had the option to buy an annuity, sold by insurers which turn funds into a regular guaranteed income. However, these were becoming poor in value as rates began falling.

The consequences of freedoms have been felt in recent years with unsophisticated savers putting money into high-risk investments, defined benefit transfers becoming more popular and scammers using all sorts of tactics such as cold-calling and disguising themselves as investment companies to get people to hand over their money.

Scams have certainly been one of the largest impacts of the reforms and data showed that more than £30mn had been lost to pension scammers between 2017 and August 2020.

So this is why we now find ourselves asking the question: are pension freedoms a success or a regret?

Hopelessly dipping in

Since rules were relaxed on how pots can be accessed savers have made good use, with retirees collectively withdrawing huge sums each year. Latest data from HM Revenue & Customs (published in April) showed more than £45bn has been taken from pots since 2015.

The concern is that this money has been taken out irresponsibly, without proper guidance or advice or concern for the consequences, something that pension freedoms made possible.

Steve Webb, who was pensions minister at the time these freedoms were introduced, says that while some people may be withdrawing at unsustainable rates, there are others where cashing in a pot made sense.

“There are a lot of people who have got multiple pension pots, and to take one of these pots at age 60 to tide you over till you can get a state pension at 66 and literally take a sixth of the pot a year for six years may be entirely sensible,” Webb explains.

Recent data from the FCA showed the most popular withdrawal rate was 8 per cent or more, with the exception of pots worth more than £250,000.

In the 2020-21 financial year alone, more than 217,000 people with pots worth less than £10,000 decided to fully withdraw their pension. This compared to only 13,000 who decided to use partial drawdown so that some of their fund remained invested.