One of the questions most frequently faced by financial advisers is what are pension freedoms and how can I use them?
What is pension freedom?
The Government announced pension freedom in the 2014 Budget and it came into force in the 2015/16 tax year. It means anyone aged 55 and over can take the whole amount from their pension pot as a lump sum, paying no tax on the first 25% and the rest taxed as if it were a salary at their income tax rate.
Is it all pension pots?
No, pensions included in the new act are the defined contribution type where the individual and/or the employer have added to your pension pots – these include most occupational and private pensions. Not included are state pensions or defined benefit schemes such as final salary.
Before pension freedom you could still enjoy 25% tax free but the rest was normally used to buy an annuity, which would give you an income for the rest of your life. Following pension freedom the pension holder is free to spend or invest the money as they see fit.
What has happened since pension freedom?
Pension freedom was 1 year old in March 2016; research was carried out to see what people did with their money.
- Spending – Pension savers have been taking out around £27m a day from their pots – a figure which exceeded expectations. 188,000 savers have released around £18,600 on average from their pensions, bringing the total amount of money being transferred into the economy to £3.5BN.
- Age – Freedoms had been most popular with those in their 50s. For the 55 to 59 age group who have accessed pensions, only 16% have bought an annuity. Data from the FCA showed 40% used drawdown, where money is left invested and income is taken. Even more, 44% took lump sums. Annuities were most popular with those aged 65 to 69.
- Investments – While 1 in 5 paid off debts many sought new investments. Amongst those choosing to become DIY investors, the most widely bought funds were UK income funds such as Artemis Income, Artemis Strategic Assets and CF Woodford Equity Income fund.
Three years on
On the 12th June 2017 the FCA produced an interim Retirement Outcomes report. This revealed some fascinating Pension Freedom trends:
- 1 million pension pots now accessed
- 64% of pots accessed less than £30,000
- Accessing pots early is now the new norm
- More than half pots accessed taken in full
- 90% of pots taken in full less than £30,000
- Drawdown twice as popular as annuities
The FCA found that many of those accessing pots were placing the funds in other forms of savings suggesting a level of mistrust in pension. There was also some evidence that consumers were accepting drawdown from their providers without fully considering their options. The FCA also noted that annuity providers have been leaving the market, leaving less choice for consumers with a lack of alternative products in place.
To discuss pension freedom with an FCA regulated adviser, just fill in an appointment booking form