The power to spend your life savings as you want
WHAT a dramatic year i t has been for anyone planning their retirement. on april 6, savers were given unprecedented freedom to access and spend their pensions as they wished. It was the biggest shake- up i n the retirement rules for a century.
The Chancellor’s pension revolution was hailed as the end of the scandal of savers being given annuities — which turned their pension pot into an income for life — that paid poorly or were inappropriate.
No more would pensioners see their nest eggs go straight into the pockets of insurers when they died.
But these changes thrust a huge amount of responsibility onto retirees and left many people confused.
Essentially, where once there was no choice at retirement, suddenly there were three options. once someone hit 55, they could do exactly as before and take out an annuity, giving a guaranteed income for life. only an annuity offers the assurance of an income that lasts as long as you do.
But now they could also take the full amount of the pension pot in cash and spend it as they wished. or they could keep their pot, invest it, and then dip in and out of it like a bank account.
after pension freedom day, insurers reported an 80 pc increase in the number of phone calls to them.
In the first three months, £2.5 billion was paid out to customers who either took an annuity or dipped into their pot.
In 95 pc of cases where savers took a lump sum, they withdrew the full amount from their pot. It is largely thought these were savers who had pensions pots of less than £20,000 and, who, under the old rules, would have had to turn that into an annuity paying just a few pounds a week.
of cash lump sums paid out, £8 in every £10 went to savers aged under 65, with £6 of every £10 going to someone under 60.
annuities still remained popular, with £990 million placed in to them by savers, with an average pot of around £55,600. Previously, the average nest egg for those buying an annuity was just £26,000.
Drawdown plans, where someone invests the full amount of their pension into an account that allows them to make regular withdrawals, were used by customers with an average pension nest egg of £68,000.
Tom Mcphail, head of pensions at investment firm Hargreaves Lansdown, says: ‘We have seen high levels of engagement and very positive feedback from customers. at the beginning, there was a lot of pent-up demand from savers who’d waited for the pension freedoms to begin.’
With all these freedoms came responsibility, and there were problems wi t h insurers, policymakers and customers all struggling to get used to the new rules.
In general, though, savers have relished the chance to plan their own retirement spending to ensure their nest egg lasts the rest of their lifetime. Even with the best of intentions, this can be challenging. Turning a lump sum into an income, and making sure you don’t get left with a nasty tax bill, is not easy — particularly if you don’t want to take any risks.
alongside this, you also have to find your way through the minefield of pensions jargon and the competing offers of insurance companies.
What’s more, next year will see the introduction of a new state pension, which will be riddled with complications of its own.
Savers believed they had been promised that everyone would get the full £151.25 a week new state pension as long as they had contributed to National Insurance (NI) for 35 years.
However, the smallprint has revealed that many workers who saved into final salary schemes and contracted out of the state second pension wil l have deductions made f rom their new state pension.
While no one will get less than they were due under the current system, they may not get as much as they thought they would with the new.
The Government has recently launched a major publicity drive to help explain all the changes.
meanwhile, plans t o all ow savers who have already taken out an annuity the chance to cash it in have been delayed, as insurers wrangle over the best way to make this possible.
Finally, you have to beware of conmen who are out to get their hands on your pot by convincing you that their phoney deals or offers of spectacular returns are the real thing.
We begin our two-part series of money mail Specials by looking at what has happened since pension freedom day and what other changes are still due.
Tomorrow, we highlight the danger of conmen who could try to dupe you out of your pot — and we look at the best way to secure an income in retirement.
We hope it will encourage you to start planning your retirement, if you haven’t done already. Because whether you are 25 or 65, it’s a decision you shouldn’t delay.