A Year of Freedom

A little over 12 months have elapsed since we saw the biggest shake up to the pensions industry in decades with the introduction of pensions freedom. There was much scaremongering beforehand that there would be a rush of people cashing in their pensions, but let’s look at what has happened in reality.

The rush never really happened

After the initial rush of people to withdraw money, there has been substantially less outflows from personal pensions than was expected with less than 1% of the pension funds available for encashment actually being cashed in. That said, in absolute terms almost £2.5bn was withdrawn in the first 3 months of the changes being implemented.

Where did the money go?

Industry figures show that 80% of the cash released was actually just moved to bank accounts or cash ISAs. This is quite disappointing for a number of reasons:

1) These accounts are all generally paying a very low rate of interest
2) Bank accounts do not allow your money to grow very tax efficiently
3) Both accounts will suffer from inheritance tax on death

Now, it could be that these are just the temporary homes for the cash taken out of pension funds pending investing elsewhere, otherwise, one can seriously question whether the cash should have been withdrawn in the first place.

On a more positive note, only 18% of the cash withdrawn has actually been spent – most of it going on home improvements and other luxury items.

And what about annuities?

Rather unsurprisingly the number of annuities bought since the freedom changes were announced has dropped by 61%. This is not necessarily a good thing. Annuities do have a place in the financial market as they provide a guaranteed income for life – useful for covering at least some of a retiree’s fixed costs. As investors are now putting less and less money into annuities this could mean that they could run out of money during retirement which is something that really needs to be avoided.

And then there are also scams…

Unfortunately, scams are on the rise and this is particularly alarming. A survey by ‘Which?’ magazine in May 2015 found that a third of the respondents had received approaches about accessing their pensions from companies they were unsure of. More needs to be done to make sure that the public are made aware that fraudsters out are actively targeting their hard earned savings.

Advice is on the rise

Thankfully the public have taken heed, have listened to the warnings from journalists and have been contacting Financial Advisers for advice. The website Unbiased.co.uk (where you can find an Independent Financial Adviser) recently reported a rise of 64% in pension enquiries and we, as a firm, have seen a sizeable increase in the number of unsolicited enquiries from the public over the past 12 months. This could also be a reason why not a single pension above £150,000 has been cashed in in its entirety as Financial Advisers are all too aware of the punitive tax bills that people would stumble into from cashing in too much of their pension in one go.

The one thing for sure is that with pension freedom Doomsday hasn’t happened but it has certainly highlighted the need for thoughtful Financial Advice for most people. Pensions and retirement planning is a complex subject and it is something that needs careful consideration, especially when you could continue living for up to 40 years in retirement.