Pension Freedoms Anniversary
On the 5 year anniversary of pension freedoms we look at the changes that were made to the pension system in 2015 and how they’ve given us much greater flexibility and control over how we access our retirement savings.
Prior to the introduction of pension freedoms in 2015, most people with defined contribution pensions used their pension savings to buy an annuity which would guarantee an income for the rest of their lives.
The aim of the 2015 pensions shake-up was to give people more choice over what they could do with their pensions at retirement.
Pension freedoms only apply to defined contribution pensions, otherwise known as money purchase pensions. With this type of scheme, the amount you get at retirement depends on how much you and your employer have paid in (if it’s a company scheme), and investment returns.
What we’ve seen at Profile Pensions
Flexibility around drawing down part of a pension is an important option to our customers. We caught up with Michelle Gribbin, our Chief Investment Officer to explain what we see when we are speaking to customers "When people come to us for pension advice we ask if they’re planning to draw a lump sum from their pension, and on average 49% tell us that they don’t know yet. However, 33% state that they do wish to take their lump sum, versus 18% who don’t plan to, so this tells us that when people are aware of this flexibility it appeals to them.
“69% of our customers tell us they wish to take advantage of the 25% tax-free allowance.”
This supports our view that a more flexible pension which could allow you to draw down part of your pensions tax-free which is an important option for many people. People tell us that they plan to take their lump-sum at an average age of 58, with 55% of respondents stating they’re planning to take their lump-sum at age 55.”
“In the current climate, many people will be under greater financial pressure than they might have expected to be. Many will be planning to draw on all sorts of rainy day funds and of course a pension could be one of these options. This is a good example of where being in a flexible pension is really important.
Before pension freedoms were introduced it was more typical that if somebody wanted to dip into any of their pension they would have needed to buy an annuity at whatever rate was available to them at the time. Thanks to pension freedoms, it is possible to draw on some of your hard-earned savings, while leaving the rest invested to benefit from what we hope to be a recovering stock market.
However, it is important that people don’t assume that they already have this ability. Across 2,700 defined contribution pensions that we’ve reviewed since October we’ve found that 94% of people with defined contribution pensions have at least one pension that does not offer flexible access. This is largely because people are holding on to old style pensions that didn’t benefit from the 2015 regulations. We move thousands of customers into flexible pensions which means they can access their tax-free cash at age 55 whilst leaving the rest invested. We also often hear that the ability to leave a pension to a loved one is a key driver for people to transfer into more modern pensions.
At Profile Pensions we believe that pension freedoms have been a positive change and offer the flexibility that many of our customers value. These figures also highlight why it is so important that people get to know their existing pensions and take impartial advice to ensure that what they’ve got meets their needs.”
Freedom and choice
Pension freedoms allow you to take your whole pension out once you reach the age of 55 if you want to.
If you did this, you’d pay no tax on the first 25% of this money, and the remainder would be subject to income tax.
However, the big risk of doing this is that you end up spending your pension too soon, and that you end up with a hefty tax bill because taking out a big lump sum pushes you into a higher tax bracket. It may also affect any means-tested benefits you receive.
Find out more about tax and pensions.
If you don’t want to take all of your money out at once, pension freedoms mean there are other ways to use your pension to provide you with an income.
Capital at risk. This does not constitute personal advice. Past performance is not a guide to future performance