Pensions Freedom – a success??

Thursday, March 02, 2017

Hundreds of thousands of savers have cashed in £9.2 billion from their pension pots since pension freedoms were introduced in April 2015.

Over 1.5 million payments have been made using pension freedoms, with 162,000 people accessing £1.56 billion flexibly from their pension pots over the last 3 months, according to HMRC figures released in January 2017.

So, does that make Pension Freedom a success? With added flexibility comes added responsibility, so are people taking advantage of this new legislation to allow them to manage their finances in a more efficient way – or are they simply robbing Peter to pay Paul?

Let’s just briefly recap what happened in April 2015. The Chancellor of the Day, George Osborne, announced that people will be able to access their entire pension at age 55, with no limits as to how much they could take. 25% could be taken tax free with the other 75% taxed as income. The other key point was that this option was only made available to those people in Defined Contribution plans (or Personal Pensions, as they are commonly known). Those people in Defined Benefits or Final Salary type arrangements would have to transfer out to gain these benefits.

Whilst there were other changes around death benefits and succession planning, this ability to withdraw all of the money was described as one of the biggest changes in Pension Legislation ever.

So, what have people done with the £9.2Bn that has been withdrawn?? Well, to be honest, we don’t really know.

HMRC confirmed that the average withdrawal was just £6,000, which implies that it was either people encashing a small pension pot or they were taking a small withdrawal from a bigger pot. It does at least confirm that people aren’t withdrawing large sums to buy Lamborghini’s, which was one of the biggest challenges offered to this legislation change. But with longevity becoming more and more of an issue, people’s pension funds need to provide an income in retirement for longer and longer.

Therefore, whilst it may be tempting to release some or all of your pension fund, do make sure you take advice from a qualified individual. Because, as always, added flexibility always brings added responsibility.

A pension is a long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and tax legislation.