Helen Nugent

A common sense approach to pensions

When the government implemented radical new pension freedoms a year ago, it was the most fundamental reform to the system in almost a century. And, like so many eye-catching changes, it was given a political spin. ‘Freedom and choice in pensions’ was how it became known. Sounds good, doesn’t it?

It’s hard to argue with words like ‘freedom’ and ‘choice’, but there were plenty of people who doubted the efficacy of the new regime. Put simply, ministers abolished the requirement to buy an annuity and introduced new ways to access pension savings.

As in the past, pension holders can still take 25 per cent of their pension pot as a lump sum. Under the new rules, those aged 55 and over can now take the whole amount as a lump sum, paying no tax on the first quarter and the rest taxed as if it were a salary at their income tax rate. It really only concerns private pensions, also known as defined contribution plans.

Doom-mongers predicted a run on pension cash amid fears that pensioners were storing up trouble for the future. I’ll admit that I was among them. I mean, if you’ve spent years putting money into a private pension, do you really want to blow that on a flash new car and an expensive cruise? It’ll be no holiday if you have to rely on the state pension to see you through your golden years.

Now it seems that I have to eat my words. Latest data from the Association of British Insurers (ABI), the trade association for insurers and providers of long-term savings, shows that one year since the introduction of the Freedom and Choice reforms, people are taking a common sense approach with initial demand for cashing in pensions settling down.

Yes, smaller pots are generally being taken as lump sums (£3 billion has been paid out in 213,000 cash lump sum payments) but larger pots are still being used to access a regular retirement income.

Who would have thunk it? And not only has common sense prevailed, annuities are also starting to see a revival in popularity. The once reviled product – essentially an income for life in return for your pension pot –  is back in vogue. The number sold outstripped income drawdown products for the first time in the most recent quarter with 21,200 sold, worth £1.1 billion, compared with 19,700 drawdown policies, worth £1.4 billion (income drawdown allows savers to take out regular amounts of money while their money remains invested).

The ABI’s director of policy for long-term savings and protection, Yvonne Braun, said: ‘One year on from the pension reforms, the freedoms are settling in and working as intended. This is a credit to providers who worked incredibly hard to get ready for the changes with less than a year to implement them.

‘Following some initial pent up demand, the number of people accessing their pension pot as cash in one go has settled down. People are taking a sensible approach and considering how they will pay for their whole retirement. Annuity sales are beginning to see a revival, with more annuities than drawdown products sold in the last quarter. This shows people still really value a lifelong guaranteed income. ‘Our key challenge remains ensuring people save enough for their retirement. With increasing life expectancy and declining final salary pension provision, we must turn our attention to helping customers grow bigger pots.’ Of course, for those people who know what they’re doing, pension freedoms can be a great boost. But new rules mean new challenges and it’s easy to make mistakes. If you’re approaching 55, don’t make any hasty decisions. Do your homework and, if necessary, seek professional advice.  

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