Believe it or not it is now three years ago since the introduction of the Pensions Freedom & Choice reforms. These reforms opened up a completely different suite of options for individuals with Money Purchase (a.k.a Defined Contribution) pension arrangements. The key changes made included:
- Unrestricted access to your pension savings from age 55, or earlier if you are in serious ill health
- Wider choices at retirement, including the ability to take any tax free entitlement you have within your arrangement as regular income
- No obligation to purchase an Annuity with your fund at some point into the future, although this option may still be suited to you
- More flexible death benefits for your beneficiaries
Despite initial concerns of reckless spending, it seems most people are using the improved flexibility sensibly. Data from the Financial Conduct Authority (1), however, does make it clear that people are changing how and when they take benefits from their pension. Many are taking their pots earlier than 65, and drawdown has become much more popular than annuities. HMRC figures (2) suggest that since the introduction of these reforms, some 3.7m payments have been made to 1m individuals, extracting a total of approximately £17.5bn.
In spite of these trends, knowledge, understanding and engagement remains low. A third of Defined Contribution pension holders do not know the size of their pension savings, 53% have not reviewed how much their pension pot is worth in the last 12 months and just under half do not give their pension much thought until they are two years from retirement.(3)
Financial Conduct Authority data also reveals a staggering increase in the number of pension savers who are going without financial advice. Before the freedoms 5% of drawdown was bought without advice compared to 30% today.(4)
Pensions are not only today an extremely tax efficient way for everyone to save effectively for their retirement, they now carry the wide flexibility through these reforms to fund your retirement lifestyle as your circumstances change.
We believe pensions today continue to form the core to any individuals long term retirement plans but pension freedoms has served to make the decision on when and how to retire more complex.
If you would like to discuss any aspect of your pension and how the pension freedoms may benefit you, then please contact your usual Cullen Wealth consultant.