How popular has pension freedoms been?

A pretty solid pension’s day was had on 7 January, with an eloquent debate in the House of Commons about equalisation of state pension ages – how much notice do you have to give to people of changes to the state pension age?

Equality is as equality does, but it helps to let people know of such changes!

On the same day we have had publication by the FCA of a further tranche of data, following the introduction of pension freedoms last April.

There is a touch of irony in the fact that on the same day as a debate that puts forward stories of serious hardship in retirement we had data showing how many people have encashed their pension plans.

I still maintain that we will not get a full picture of the effect of the pension freedoms until a full year has passed, but there are still some interesting pointers.

Very briefly, the numbers:

According to the report, 120,969 pensions - nearly 70% of the total accessed under the new rules - were fully encashed, with nearly 90% of these being small pots of less than £30,000. Most withdrawals for pots between £10,000 and £29,000 were seen in the 55-59 age group across both UFPLS and drawdown.

Just over 30% of plans were used to take an income after tax-free cash by using drawdown, UFPLS or an annuity, and 84% of those going into drawdown areas said to be taking ’prudent’ levels of income.

Other headlines to note include:

  • 58% of consumers going into drawdown stayed with their existing provider.
  • 64% of consumers purchasing annuities stayed with their existing provider.
  • Of policies with guaranteed annuity rates, 68% of such rates were not used, particularly if the fund was less than £30,000.

So what can be said about this? It is logical that small pots have been cashed in because an annuity for such a size of fund would be tiny. I would have been interested to see what the money was used for and particularly whether excessive tax was paid. This becomes even more relevant in the cases where a number of larger pots encashed.

With the changes in the annuity market it seems concerning that nearly two thirds are not shopping around and that the work done previously on the open market option has not been heeded – perhaps further work is needed? Drawdown is perhaps not so concerning as it is an option under the existing policy. My only point would be whether the charges payable and the range of investment options available are appropriate.

My final two concerns relate to income drawdown. It would appear that nearly half of those going into drawdown have taken no advice, but that many are taking prudent levels of income. I have long been an advocate of advice for income drawdown in the majority of cases - particularly if the drawdown pot is to provide an income for life within a specific risk profile.

I am still of the view that there are a lot of people in drawdown who might have previously bought an annuity and as I write there is news of the Chinese stock market being suspended and falls in the UK – do those in non-advised drawdown fully understand the implications of events like this?

And so we come to my final point – people are not seeking advice or guidance (Pension Wise?), and this makes the review of the advice market even more important.

Head of Platform Technical

Mike Morrison has worked in financial services for far too many years. In 1990 he joined Winterthur (now AXAWealth) as Technical Manager, playing an instrumental role in the development of their SIPP product and later their pioneering work on income drawdown.

Mike is an ex Chairman of AMPS (the Association of Member Directed Pension Schemes) and is on the Financial Planning Committee of the ICAEW. He is also an Associate of the Pensions Management Institute and the Chartered Insurance Institute, and he holds both an LLB and an LLM in European Law.

An accomplished speaker and writer on financial services matters, Mike is passionate about retirement and savings issues, and how we can better communicate these to a wider audience.