The revolutionary Pension Freedoms have been in force for three years now. First announced by the then Chancellor of the Exchequer, George Osborne, they caught the pensions industry off guard as none of the changes had been previewed before the speech.
Announcing that “no-one will have to buy annuity”, but would have more freedom in how they spent their retirement wealth, the immediate impact of the Chancellor’s speech was to significantly reduce sales of annuities, and since then the market has never really recovered.
There were concerns that enabling earlier access to their pensions wealth would lead people to make impulsive decisions to purchase luxuries, which could have a profound impact on their future retirement income. Figures recently released by HMRC show that from April 2015 to January 2018, £16 billion had been withdrawn – £6.5 billion being withdrawn in 2017. While there is no hard evidence of exactly where people are spending the money, it seems people are not using the freedoms to take out their entire pensions nest egg – the average withdrawal now is £7,596, down from £9,630 last year.
Certainly, we would hope people are making sensible withdrawals. It is important that people think ahead and make sure they are retaining the pension(s) required to maintain and sustain the income they need over their entire retirement period. As such, they should only be withdrawing money from small pension pots that sit outside of that need.
From our perspective, as Independent Financial Advisers, the introduction of pension freedoms particularly benefited pension holders; firstly, in the ability to choose what they did with their pension wealth.
Prior to the Freedoms, most people moved their pension pot into an annuity at retirement, although it wasn’t mandatory as George Osborne suggested. Over the past three years, more people have chosen to go into what’s called flexi-access drawdown, where their money stays invested, and they draw down the income they need for as long as the funds last. The freedoms also enable people to draw down as little or as much as they want – while previously this had been either fixed via an annuity or restricted by Government Actuarial Department (GAD) rates. Managing the funds is crucial in order to maintain and ensure they can last as long as they are needed.
Secondly was the change to pension death benefits, allowing any money left in a person’s pension to be bequeathed to family or any chosen beneficiary, free of inheritance tax and also of income tax if the person dies before age 75. If they die after 75, the beneficiary pays income tax at their marginal rate of tax on withdrawals from the pension. There is a two-year window for death benefits to be ‘designated’, after which the tax situation can alter. IHT planning and managing withdrawal of funds to maximise tax efficiency, is where Independent Financial Advice can save families’ wealth to pass down the generations.
So, are annuities a thing of the past? The answer to this question is ‘far from it’. While annuity sales are a fraction of what they were prior to March 2014, figures have been rising again. Legal & General recently reported a 78% boost in individual annuity sales in 2017, the highest volume it has seen since 2014, selling £671m worth of annuities last year.
For those who want the security of guaranteed income, an annuity can still be the best option.
We have also seen changes to annuities terms and conditions, from decreasing payments, to greater flexibilities around death benefits, allowing for income payments to beneficiaries and lump sum payments within established guaranteed payment periods, and tax-free payments pre-age 75.
Some retirees are now splitting their retirement pot between annuities, for the guaranteed income an annuity provides, using that to meet regular living costs for example, set alongside an investment portfolio held in drawdown, which allows the option to keep their retirement pot growing via the investments and drawing down from that to top up their income as and when needed, depending on their individual circumstances.
At Lowes Financial Management, we have been successfully helping to build and preserve clients’ wealth for generations. Whether you are already retired, approaching retirement, or a long way off, some good advice could make a significant difference, so why not contact us for a free, initial consultation to see how we can help.
*The value of pensions and the income they produce can fall as well as rise. You may get back less than you invested.