Pension Freedoms

Last year the biggest pension changes seen by this generation came into force. Although there hasn’t been quite the rush of people determined to withdraw all their money from their pension early, to buy luxury things such as hot tubs or holidays, the statistics within the last year suggests, however, that those that have accessed their funds could have been more prudent.

HMRC have claimed that approximately 188,000 men and women have dipped into their pensions since April 2015, with an average withdrawal of £18,600. This means that near to £3.5 billion was transferred from pension pots and back into the economy.

How people are deciding to access their pension is changing too. Beforehand the most common approach to accessing retirement funds was, due to the fact it was the only viable option, annuities. These were purchased just by 13% of individuals. Drawdown schemes were started by 30%, and the most popular was the un-crystallised funds pension lump sum (UFPLS) – allowing the individual to take money from their pension savings directly, which 34% of people opted for.

The last statistic may be an indicator that many are hastily obtaining their pension pot without seeking out financial advice. The attraction of a simple withdrawal is apparent, however, there are downsides to consider. The UFPLS method enables you to take numerous lump sums, and 25% of each is tax free.

However, when you are withdrawing from an existing pension, it may not be arranged correctly to offer an income. A drawdown scheme meanwhile is ideal for generating regular income, and therefore more than likely to be a better alternative to continue for the long term. Both UFPLS and drawdown face the potential of stock market volatility. An annuity doesn’t have much in the way of flexibility, but does guarantee an income for life.

Whilst annuities fell in popularity shortly after the pension freedoms came into effect, they are now making a bit of a comeback. With 21,200 annuities sold in comparison to 19,700 drawdown schemes in 2015, the figures suggest annuities have overtaken drawdowns in level of popularity.

1 in 5 people that have taken money from their pension in 2015 said that it was in some way to pay off debts. Whilst debt management is definitely advisable, using your retirement funds will often be regretted later on in life.
Whether you’ve accessed your pension from the new freedom for this or not, now’s the best time to get some advice regarding your next pension move. Any decision should be made after receiving financial advice, even if the decision is to do nothing.