‘Pension freedoms gave my income a £4,400 boost’
One man used money released from his pension to buy a shepherd’s hut, which he rents out on Airbnb. Sam Meadows reports
The successes and failures of the radical overhaul made to Britain’s pension regime in 2015 are coming to light as a committee of MPs calls for evidence in an effort to ascertain whether the “freedoms” are working.
Finance professionals, charities and members of the public have submitted views to the Work and Pensions Committee’s “Pension Freedoms Inquiry”. The evidence paints a broad picture of how the reforms are being used.
The freedoms were introduced two years ago and allow those over the age of 55 to take their entire pension pot as a lump sum, with the first 25pc tax-free as usual and the rest taxed as if it were income. Before the reforms, the vast majority of pensioners would buy an annuity, which guaranteed an income for life.
George Osborne, the chancellor at the time, described the move as creating choice as to how pensioners received their money, but some commentators, including the head of the TUC, Frances O’Grady, voiced concern over how the money would be used. Now written evidence to the committee paints a clear picture of what people are doing with their cash. vidence sioners
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He bought a “shepherd’s hut” and earned an income of £6,000 last year. His pot would have purchased an annuity worth just £1,600 a year. “Pension provider [Aviva] were fine – very professional about checking I had taken advice before drawing down. No pressure from anyone,” he wrote.
Savers can also use the freedoms to assist with prudent tax planning. Another man, also unnamed, took a portion of his pension pot early in order to get around the pensions “lifetime allowance”. He said investment growth would probably have caused his pot to breach the allowance within five years.
Taking the money warded off this possibility, as the value is calculated at certain “crystallisation” events. He used the money to buy a boat.
The most alarming evidence came from Pamela Hewitt, who drew her submission from her experience working as a welfare benefits officer for a social landlord. One of her clients spent £120,000 of his pension pot on “gambling, a car and alcohol”, she said. Ms Hewitt wrote that this individual had held an engineering job until he was made redundant, his house was repossessed and he fell into a spiral of depression. His benefits had been stopped because of his savings, including a pension, but once this was investigated it was discovered he had spent all the money. He later released a further £20,000 from his pot ag against the advice of his accounta accountant. His pot was originally worth £250,000 and the man had dr drawn on as much as possible, paying very high rates of tax in the process. “If Mr A had not b been able to access his pension pot I can only assume that the years lea leading up to retirem retirement would have b been more stabl stable, as prior to h him having ac access, and f following his having spent it all, he has been a stable and ideal tenant,” she wrote. “I think he chose to spend his money not to take advantage of the benefit system but because he didn’t care what happened to him, had addiction issues and knew there would eventually be a safety net.” A senior local authority official warned that councils could use “deprivation of capital” rules to block benefits payments for people who choose to deplete their entire pension pots intentionally in this manner.
Ms Hewitt recommended that fund shop, also cast a new light on how people use the pension freedoms. The City regulator estimated that 53pc of pension pots accessed using the freedoms were being completely withdrawn, but this failed to take into account a person’s entire pension savings.
A J Bell’s numbers suggest that, while many pots are being entirely drained, only 7pc of savers are withdrawing their entire savings, with the rest drawing on smaller funds.
There are also some alarming numbers relating to the sustainability of people’s savings, with 77pc of savers withdrawing more than the recommended limit each year. The “safemax” limit prescribes a maximum annual withdrawal of 4pc a year, but clearly most are exceeding this. Almost all the pensioners in this category have other sources of income, however.
77pc of savers withdraw more than the recommended limit each year
One pensioner boosted his income after buying a hut to rent out on Airbnb; Frances O’Grady of the TUC, below left, has voiced concern about the freedoms