‘Pen­sion free­doms gave my in­come a £4,400 boost’

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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

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