How popular have the pension freedoms been?
In the period running up to April 2015, I was often asked what I thought we would see with the advent of the pension freedoms.
My initial thoughts were that there would an immediate rush to get money out – the “just because I can” argument. I even surmised there would be some people who would take their money out and hold onto to it for a while and then realise that they did not need it before trying to put it back into their pension. I am pleased (for completeness) to say that we had such a case.
The latest figures from HMRC seem to confirm many of my predictions and the statistics show that withdrawals seem to have tailed off in the last two quarters, with a total of £1.6bn (£820m in the first quarter of 2016 and £800m in the last quarter of 2015) withdrawn compared to £2.7bn in the previous two quarters. This gives a total of £4.35bn as the total withdrawn for the year since the rules changed.
As anticipated, many of the withdrawals were from people with relatively small funds and for those aged between 55 and 60.
As I have travelled around the country talking to financial advisers post April 2015, I have asked audiences for their comments on pension freedoms and there has been evidence of a trend emerging.
It’s very common that where advisers have clients with an up-to-date file and a good adviser relationship, the questions asked about withdrawing money would have resulted in options to consider and solutions found that may or may not have meant that money was withdrawn.
Those consumers without an adviser will have likely taken their pension papers from the cupboard, blown off the dust and rang their product provider customer helpline number to ask for a withdrawal of their money. It is not surprising that the FCA work has been focussing on risk warnings, wake up packs and guidance.
A good example put to me by one particular adviser was that his client had come in to talk with the aim of withdrawing a net amount of cash to assist his son to get on the property ladder and to go to university. A consideration of the numbers and the tax that would have been payable concluded with the client taking out a mortgage to buy the property. Okay, this is a high level example, but to me is a good one of the advice process in action. I also fear for cases such as this if we move to an ISA, TEE base of taxation as there would have been no obvious barrier to the transaction.
Fittingly, the Telegraph started off the year with some headline-grabbing research titled “What are the over 55s spending their pensions on?” This seemed to major on frivolous spending. A few weeks later the PLSA published research in which home improvements were top of the list, followed by one-off treats and a small percentage of people using the money to pay off mortgages or other debt.
The real research (which I am sure is currently being undertaken) will not necessarily show that much cash has been withdrawn but will look more towards why it was withdrawn. The addition of what issues were considered and dismissed in the encashment decision process will be interesting to read. Most particularly (I would suggest) would be whether the question of longevity was considered and, if it was but then dismissed, whether there was any alternative consideration?
The difficulty is the role of guidance, and with Pension Wise perhaps not being an overwhelming success, I think it will be very difficult to convince people who are hell bent on consuming their small pension pot not to.
Unfortunately, I do think it will need some stories of poor decision making to emphasise the longevity point. Although, as an industry, we must work hard to try and prevent such poor decision making.
Bright sparks which seem to have ignited on the horizon are a few positive stories about annuities, and I have always been of the view that annuities will have a place in some retirement solutions. Let’s hope that some innovation in this market will mean that longevity is not such a fearful subject.