This week marks 10 years since former Chancellor George Osborne unveiled ‘pension freedoms’ in a bombshell Budget announcement, prompting quips that pensioners would be accessing their pensions to go out and buy Ferraris.
The reforms, which were implemented in April 2015, scrapped restrictions that previously applied to ‘drawdown’ and ushered in a new era of freedom and choice for pension savers aged 55 and over. Since their introduction, £72.2 billion worth of pensions have been accessed ‘flexibly’.
In 2021/22, a total of 705,666 of pension pots were accessed for the first time, while 205,641 new drawdown policies were entered into but not fully withdrawn.
Tom Selby, director of public policy at AJ Bell, said: “It is almost a decade since George Osborne’s shock pension freedoms announcement, arguably the most significant pension tax reform in almost a hundred years and a reform which has revolutionised the retirement income market. Where previously most people bought an annuity with their existing provider, with many ending up with a poor value product as a result, a world of choice and flexibility has been opened up to millions of ordinary savers.
“This flexibility has completely shifted the retirement kaleidoscope in the UK, with the majority now choosing to stay invested through ‘drawdown’ rather than buying an annuity. The annuity market has rebounded recently as rates have improved, but drawdown remains the most popular retirement income avenue.”
However, Selby warned that handing people total freedom over how they spend their own money also comes with risks and challenges. Keeping money invested through drawdown requires engagement, with those taking too much too soon running the risk of exhausting their fund too early.
According to the Financial Conduct Authority, only 33% of plans accessed for the first time in 2021/22 were held by people who took financial advice. Meanwhile, 40% of regular drawdown income payments are withdrawn at a rate of over 8% of the pot value.
Selby said: “Improving the support available to savers and retirees is critical. The joint review being carried out by the Treasury and FCA on the advice guidance boundary is central to this, with the proposed ‘Targeted Support’ regime potentially enabling firms to offer more useful guidance to all.
“Promoting the benefits of regulated advice, which remains the gold standard when it comes to helping people make good financial decisions, is also crucial.”
AJ Bell also raised the issue of the way in which withdrawals are taxed by HMRC. Since 2015, HMRC has chosen to tax the first flexible withdrawal someone makes in a tax year on a ‘Month 1’ basis.
Selby added: “This means HMRC divides your usual tax allowances by 12 and applies them to the withdrawal, landing hard-working savers with shock tax bills often running into thousands of pounds. At the last count, approaching £1.2 billion had been repaid to those who had made claims, although we know most people simply don’t go through this process.
“While those who take a regular income or make multiple withdrawals during the tax year should be put right automatically by HMRC, anyone who makes a single withdrawal will likely be left out of pocket.
“It is possible to get your money back within 30 days, but only if you fill out one of three HMRC forms to reclaim your money. If you don’t, you are left relying on the efficiency of HMRC to repay you at the end of the tax year. It is high time these systems were upgraded so people who use the freedoms as intended aren’t forced to go crawling to the Revenue to get their money.”
Main image: joshua-koblin-eqW1MPinEV4-unsplash
