Pension freedom withdrawals hit a staggering £6.5 billion in 2017, according to figures from HM Revenues & Customs (HMRC). With some commentators heralding these sums of flexible pension payments as the ‘new normal’, Acumen asks whether some retirees are still unaware of the inherent risks associated with this brave new world.
Pension freedoms explained
According to research by Old Mutual Wealth, 47% of 50-75-year olds were either unaware of the pension freedoms or of their impact on them – nearly three years on from George Osborne’s original announcement. For those who have visited a financial adviser (still just 14% of those surveyed by Old Mutual Wealth), that figure drops to 33%. However, a third of retirees is still a significant proportion of people who are simply not clued up about the risks at hand.
At the time he announced the sweeping pension reforms in 2015, Mr Osborne said: “People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances. And that’s precisely what we will do now. Trust the people.” However, there have been concerns ever since that not enough is being done to inform and protect retirees entrusted with these new powers.
In fact, following a major review by the Financial Conduct Authority (FCA), some sources within the finance industry are predicting an impending clampdown amid fears of reckless spending. According to The Telegraph, the UK’s biggest pension providers could be planning to discourage customers from raiding their pension pots by showing them how much they can “safely” withdraw without running out of money later in retirement.
Those who ignore the warnings and are adamant that they would like to withdraw large chunks of money, are likely be asked to tick a disclaimer box to confirm that they understand the risks involved. These types of disclaimers are being seen as possible pre-emptive interventions to cover providers in case of future lawsuits from penniless pensioners.
What pension freedom means for you
Given the lack of clarity highlighted by these various reports, we wanted to give you a recap of the broad brushstrokes involved in the pension freedom reforms. Traditionally, Defined Contribution pensions – including personal pensions, stakeholder pensions and SIPPS (Self-Invested Personal Pensions) – were used to buy an annuity when the holder chose to retire. This gave the retiree a guaranteed income for the rest of their lives.
However, the pension freedoms introduced in April 2015 changed things dramatically. These reforms meant that retirees were given much greater flexibility in how they accessed their pensions, with fewer people choosing to purchase an annuity.
Retirees choosing to exercise their pension freedoms to access their fund early can either:
- Buy an annuity.
- Leave their savings invested and use other income streams to support their lifestyle.
- Take a tax-free lump sum of up to 25% of the pension pot, placing the balance in flexi-access drawdown, and drawing an income as necessary.
- Take the whole amount in one lump sum (25% will be tax-free, but income tax applies to the rest).
- A combination of different options
How Acumen can help
According to Old Mutual Wealth’s report, those retirees who have seen a financial adviser, even just once, receive £7,000 more on average for each year in retirement. This not insignificant sum, combined with the aforementioned lack of clarity surrounding the pension freedoms, all makes it essential to speak to a reputable firm of Independent Financial Advisers (IFAs), such as Acumen Financial, if you are considering your pension freedom options.
Our experts can explain, in plain English terms, what the pension freedom changes could mean for you and your retirement prospects. If you are approaching retirement age, or are currently retired, careful planning and advice from our professional IFAs can arm you with all the facts you need to make an informed choice.