Happy birthday to the pension freedoms!


As we enter spring and reach the second birthday of the pension freedoms we can expect a proliferation of stories and analysis on the first two years and how people think it’s all gone.

We had some up-to-date figures from HMRC at the end of January and another version from the FCA at the beginning of February. I won’t bore you with all of the figures but for a flavour let’s consider the latest FCA research:

  • Over half a million pots were accessed for the first time in the year from October 2015
  • The vast majority (296,673) were fully encashed
  • Drawdown sales now outstrip annuities 2:1
  • There has been a decline in the proportion of people taking advice on drawdown and annuities.

A couple of thoughts – the fall in the number of people seeking advice on drawdown and annuities is potentially a cause for concern given the potentially complex nature of the retirement decisions they are having to make. This is particularly stark in the annuity market, with just a third of people seeking advice.

Like much of the research that has been published around the pension freedoms, the FCA research focused on numbers but not on the detail behind those numbers. What did people do with the money? What was the overall wealth of the pension holder? Did they have any other sources of income? We have been presented with an incomplete picture of consumer behaviour.

I still remember a headline from January 2016, ‘What are the over-55s spending their pensions on?’, which put a new twist on the subject: ‘people are still interested in converting their pension pot into an income for the rest of their lives but, with the new freedoms, are looking at the different ways of taking their income.”

However, according to The Pensions Advisory Service, the over 55s are increasingly spending their money on things that will boost their looks. Pensioners have informed their advisers they’d like to spend their pension on things such as breast enlargement, face lifts, dental implants and, in some cases, a new set of teeth entirely.

Experts have suggested this interest in cosmetic ways of spending pensions could be due to an increase in ‘silver separators’, with people investing more in their looks in order to find a new partner.

This rather strange view was countered more recently by a piece of research from the Citizens Advice Bureau, ‘Drawing a pension: A consumer perspective on the first year of pension freedoms’. This looked more closely at the consumer experience, the types of people using the pension freedoms and some of the barriers they faced.

So where does this all leave us? Well, my prediction was that pension freedoms would be great for those with financial advisers who could help them understand the implications of the withdrawals they are making.

Clients of financial advisers have asked if they can take money out, the adviser has questioned the request and, in the end, the financial advice process has led them to the best way of meeting their needs. A good example came from an adviser I met recently. He was

approached by a client who wanted to take a net £200,000 from his pension to assist in the purchase of a flat for his son who was going to university. The adviser did the calculations to ascertain the tax that would be payable and the client achieved his goal by taking out a mortgage.

For the non-advised there have been stories of people cashing in their pensions, simply because they can, and going no further than putting the money into their bank account. It is clear that, for lower fund values, more guidance and information needs to be available. It is also key to help people understand the tax treatment of encashment (i.e. do not cash in £50,000 in one tax year, if possible, spread it over several) and the fact that, once the money is released, they will be prime targets for scams.

On the whole, I’d say ‘so-far-so-good’ when it comes to the pension freedoms. However, I do have a couple of thoughts for the future, which I hope to address in my next blogs:

  • It is important that we have a strong annuity market for a strong pension freedoms market – the spectrum is guaranteed income at one end and risky investment at the other.
  • If drawdown is becoming the new norm then attitude to risk, capacity for loss and cash flow become vital, as does the need for financial advice.
  • My big concern is longevity risk – making sure that clients understand that their resources need to support them for life and that life could be for a good few years yet!

Here’s to the next two years!

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