The pension flexibilities are well and truly bedded-in: what choice have been made so far?
It has been two years since the introduction of the pension changes which allow employees with DC pension pots flexibility and freedom with how and when they can access their pension pots.
And with an increased personal allowance and the introduction of the Lifetime ISA, there are more savings options than ever for employees to consider.
So what has the impact of freedom and choice been?
Jonathan Watts-Lay, director, WEALTH at work, a leading provider of financial education, guidance and advice in the workplace comments, “The pension changes have brought a whole new range of options to consider. Individuals now have to think about whether they want an annuity, drawdown, cash or a combination of options; when to access their pension; if it is better to use savings first before drawing their pension; and so on.
However, it seems many don’t really understand the consequences of these options: findings from the Pensions and Lifetime Savings Association (PLSA) found that of those who were planning on using income drawdown, some pension savers thought there were no risks with drawing a regular income from their pension, and over half thought it would provide a guaranteed income in retirement. Yet despite these misunderstandings, only a minority of people paid for advice.
It also found that some very large funds had been fully cashed out; presumably triggering hefty tax bills and a shift towards more self-managed income drawdown, i.e. without the help of a regulated adviser. Additionally, it found that many had taken income from their pensions to simply re-invest into cash, stocks or shares (even after an income tax liability was incurred) – no surprises that HMRC has stated it is collecting far more in tax from individuals cashing in their pots than it anticipated.
It’s also been reported that pension fraud and in particular pension scams are on the rise. New measures have been introduced to tackle cold calling, limiting pension transfers and making it harder to open fraudulent schemes – but for scammers who are determined, these measures won’t be enough. Individuals need to understand that taking regulated advice and getting the consumer protection it offers should not be underestimated.
As we can see, whilst the pension changes offer a great deal of flexibility they also carry many pitfalls and risks, especially around tax and investment loss. A powerful way to address this is for employers to provide financial education, guidance and advice in the workplace to help employees make informed decisions to maximise income at-retirement.”