Guest blog by Malcolm Small, May 2016
It’s now over a year since the operation of the 'Pension Freedom' policy agenda first went 'live'. This policy, first announced by Chancellor George Osborne in the 2014 Budget, enabled people of a pensionable age (55 years) to access their pension funds in any amount they wanted, at any time they wanted. Any requirement to buy an annuity from an insurance company to provide a guaranteed income for life was removed, although in reality it had not been an absolute requirement for many years.
At the time of the initial announcement in 2014, the insurance industry went into shock, with some consumer groups not far behind. Prognostications of doom were widespread. People would run out of money by drawing directly from their funds in unsustainable amounts, the cry went up, or 'blow' their funds on fast cars. Financial Armageddon was predicted for Britain’s army of prospective retirees.
Over a year on from the implementation of this policy, what effects can we see?
One of my roles is as a Non-Executive Director at B&CE Insurance, providers of The People’s Pension for employers taking up their new automatic enrolment duties. Altogether, B&CE are responsible for administrating the pensions of around 2.3 million people, making them one of the largest pension providers in the land. They specialise in serving modest earners and have been in the pensions business for many decades, so the feedback from their call centres has been fascinating.
Several themes have become clear.
Firstly, people are not, in the vast majority of cases, being in any way reckless. They are engaging with their pension providers to help better understand what their options are, asking sensible questions and acting sensibly on the responses. Many with small pension 'pots' are cashing them in to pay off secured or unsecured debt. Others appear to be using their pension to support the establishment of a business. No fast cars here. This is all good.
Secondly, annuity sales have fallen and income drawdown, where the pension fund remains invested and an income is drawn directly from it, has become much more popular than it was, even for quite small pension 'pots'. There are risks and advantages to both approaches, but income drawdown leaves all your options on the table, for the time being at least, including not taking any income from your fund at all.
Thirdly, the money flowing into pensions has gone up, with sales at near-record levels in the year to April 2016. In part this may have been because of the fear of tax relief on contributions being under potential threat in the Budget of 2016, but it is clear from what I’m picking up that pensions are seen as attractive again, given the flexibility now afforded them.
All this is welcome. But it’s also becoming clear that, with almost infinite choices now in front of people at retirement, they will need support to really understand all the options they have got and to make good choices for their futures.