8th July 2016Pension freedoms – a year of thinking differently

Although fears had been expressed in the media that the new pension freedoms would lead those aged over 55 to raid their pension pots, taking all their savings in cash (despite the inadvisability of doing so from a tax perspective) good sense has, it seems, prevailed.

How funds were used

The latest data from HMRC shows that a total of 188,000 savers took £18,600 on average from their pensions, meaning that around £3.5bn was released into the economy. Data from insurers show that around 1 in 5 savers used the cash they accessed to pay off debts. So not the mass purchase of Lamborghinis, or a rush to take extravagant luxury holidays that some had predicted.

Whilst initially the demise of the annuity had been widely heralded, increased volatility in world stock markets has caused some to reconsider their decision and opt for the safety and security that a guaranteed annuity payment for life can provide. ABI figures show that the average pot being used to buy an annuity now is £51,000 – a figure significantly higher than it was before the reforms came into effect.

The freedoms have been particularly attractive to those in their 50s. Amongst those aged 50 to 59 accessing their pension pots, only 16 per cent have bought an annuity, (annuities proved understandably more attractive to the 65 to 69 age bracket). 40 per cent used drawdown, leaving their money invested and taking an income. 44 per cent took lump sums.

Accessing the cash

The most common method of accessing pension funds, chosen by 34 per cent of people, was to make use of the new option called uncrystallised funds pension lump sum (UFPLS) which allows them to access their money in instalments whilst the rest remains invested in their pension fund and sheltered from tax.

Increasing awareness of the need for pension planning

Research from Aegon UK shows that 15 per cent of the working population are saving more into their pensions following the change in the rules, meaning that 6.2m people in the UK are contributing more than they were in 2015.

The roll-out of  thousands more auto-enrolment pension schemes  is set to engage more and more young employees, giving them from an early age a chance to accumulate savings and engage with the concept of pension planning.

What the future might hold

The pension industry has started to get to grips with solutions that allow pensioners to get more sleep at night, unveiling products that offer the security of an annuity in combination with the investment potential of drawdown.  Annuities will no doubt continue to be used in later life planning, particularly now that they can be used to guarantees an income for longer than ten years, sometimes up to 30 years.

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