This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.
15 April 2020
Five years ago, the retirement landscape changed. On 6 April 2015, pension freedoms were introduced, and people were given the choice to flexibly access their pensions.
The flexible rules mean that most people over the age of 55 (rising to 57 in 2028) can choose to move their personal pension into flexible drawdown or take lump sum withdrawals (UFPLS). Both options let you control the amount of income you take, and how often you take it – but they work in different ways.
With flexible drawdown you can usually take up to 25% of your pension as a tax free lump sum. You can then choose how to invest the rest, and how much income you’d like to take (which is taxable).
If you choose to take lump sums from your pension, 25% of the amount you withdraw will usually be paid tax free and the remaining 75% is taxable. You decide how to invest anything left in your pension, and can make more lump sum withdrawals in the future.
Before these rules were introduced, many people had little choice but to swap their pension for a guaranteed income for life (an annuity).
Then and now – secure income versus keeping your pension invested
How retirees access their pensions has changed significantly. Prior to pension freedoms it’s estimated around 90% of people bought an annuity. Nowadays, according to FCA data, 55% of retirees choose to encash their pensions altogether, 34% opt to keep their pension invested either using flexible drawdown or taking lump sum payments (UFPLS). And only 11% buy an annuity.
There’s no doubt flexibility has resonated with people. Since April 2015 to January 2020, retirees have opted for flexible pension withdrawals totalling almost £33 billion.
The ability to draw as much or as little as you want from your pension certainly has its advantages, particularly with the rise of semi-retirement. More and more of us are now moving to part time working as we get older, rather than finishing work completely.
While this flexibility is certainly attractive, experience tells us that many people value certainty and security in retirement, meaning the number of people ignoring annuities could be seen as surprising.
There are other factors at play. Firstly, around two thirds of people who use drawdown to access their pension are taking only the initial lump sum. They’ve not yet started to draw an income, so might well use an annuity for all or part of their retirement income when the time comes.
Secondly, low annuity rates have seen dwindling popularity of the dependable income stream. On 2 April 2015, a 65 year old with a £100,000 pension could buy a yearly income of £5,447. The rates offered are now 13% lower, meaning a 65 year old could only buy a yearly income of £4,723.
At times when the stock market is rising, it’s easy to overlook the security that annuities provide. But the market uncertainty of the last few weeks could make the secure income that annuities give seem far more appealing. As a reminder, once you buy an annuity your income doesn’t change, irrespective of changes in future rates or any wobbles in the stock market. This means it’s important to choose the right options and give all your details before setting one up, as afterwards these can’t be changed.
Since pension freedoms were introduced, global stock markets have grown by 37%, and the average managed pension fund has grown 9%* though past performance should not be seen as an indication of what might happen in the future. *Source: Lipper IM, 6/4/15 – 2/4/20.
Remember investments can fall as well as rise in value, meaning you could get back less than you invest. The suitability of either taking a certain income or remaining invested depends on your personal circumstances and the risks you are willing to take with your pension fund.
How have the flexible rules captured the imagination of pension savers?
We’ve spoken to a nationally representative sample of 50-59 year olds who’ve not yet accessed their pension, to find out how soon to be retirees really feel about the flexible pension rules.
It appears that awareness of pension freedoms is high, with 88% of people in their 50s having heard of them. Pensions are also now seen as more exciting, accessible and relevant by many. But people do tend to find them a little more confusing.
Pension perceptions post freedoms
Scroll across to see the full chart.
Source: Survey carried out by Opinium in March 2020 for Hargreaves Lansdown.
The research also found that 24% of people who are aware of pension freedoms have either increased their regular pension contributions or made a one off contribution in the last five years – 1 in 5 people put this down to the introduction of flexible rules. This would suggest pension freedoms has gone as far as encouraging some people to save more for retirement.
When it comes to taking their pension, 41% say they’ll take advice, 39% will speak to their pension provider but only 15% plan to speak to their friends or family.
This article isn’t personal advice. If you’re unsure of the suitability of an investment for your circumstances, please seek advice. Tax rules can change and the benefits of different retirement options depend on your personal circumstances.
How we can help you benefit
If you’re approaching retirement, and you’d like to find out more about your retirement options, our guide explains the three main options in detail. We also cover the benefits and risks to help you make the best choice for your needs and circumstances.
We also offer financial advice if you need it. Remember, it’s important to consider taking advice when it matters. Retirement is a time when advice could be worth paying for, and you’ll likely benefit most. This is because it involves dealing with unfamiliar financial issues and it often involves large sums of money, so getting it wrong can have a huge consequences.
Our advisers can help you get your pension fit for retirement. The first port of call is our advisory helpdesk. They will explain what benefits you could gain from having financial advice and put you in touch with an adviser, if appropriate. You might even discover it’s not right for you. If that’s the case we’ll support you with free information to help you get on track. If you decide to proceed with advice, there will be a charge that you will discuss with your adviser.
You could consider getting guidance from Pension Wise. This is the government’s free service and at age 50 everyone has the right to get a free impartial guidance session to help them understand their retirement options.
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