Ten years of pension freedoms

Ten years ago, pension freedoms revolutionised the retirement landscape in the UK. For the first time, individuals aged 55 and over were given greater flexibility in how they access and manage their pension savings. While this landmark reform in legislation unleashed choice and flexibility, it also brought new complexities that require careful navigation and ideally, professional advice. Jason Lloyd, Independent Financial Adviser discusses.

Ten years on

Research commissioned by YouGov plc on behalf of Royal London indicates that many individuals are making critical financial decisions without seeking advice or fully understanding the tax implications.

Among UK adults aged 50 and over with defined contribution (DC) or personal pensions:
Only 37% considered how a lump sum withdrawal might impact their tax rate or could potentially push them into a higher tax bracket.
Just 39% of respondents consulted a financial adviser before withdrawing money from their pension.

Making rash decisions at 55

Worryingly, the research highlights a trend of individuals hastily accessing their pension funds as soon as they reach the minimum qualifying age of 55. Nearly 1 in 12 withdrew their tax-free lump sum within six months of becoming eligible.

Since the introduction of pension freedoms in April 2015, retirees have been able to choose from a variety of options, including:

• Taking lump sums directly;
• Withdrawing the entire pension pot;
• Drawing a continuous income through income drawdown; or
• Purchasing an annuity for guaranteed lifetime income.

Many even combine these strategies to suit their circumstances. However, with so many possibilities, deciding on the best approach can be a daunting and complex task.

Allure of tax-free lump sums

The temptation of tax-free cash remains compelling, with over half (55%) of those eligible opting to take the maximum 25%. However, questions emerge regarding how this money is being utilised and if being used wisely:

• 32% used the funds to clear debts, including 15% who paid off a mortgage and 18% who tackled other borrowing, such as credit card balances or car finance.
• 26% depositing their lump sum into a savings account or bank account.
• Others chose to spend their money on home improvements (19%) or to support family members (8%).

These decisions can significantly affect long-term financial security, particularly when made without advice.

Complexities of retirement planning

One of the most striking revelations is how few people seek financial guidance when making these significant decisions. Alarmingly, 18% of those eligible to withdraw from their pension did so without consulting anyone – not even family or friends. Meanwhile, only 20% of those aged 50 or over with a DC or personal pension utilised the government-backed Pension Wise service for advice.

The research also uncovered widespread concerns about the long-term impact of these decisions. Over two in five (42%) people aged 50 or above admitted they fear running out of money during retirement.

Make informed pension decisions with expert advice

Your pension is one of your most important financial assets and making the right choices regarding your pension is essential for ensuring a comfortable retirement.

Whether you are considering taking a tax-free lump sum, planning for future income or are simply unsure where to begin, professional advice can help you make informed decisions that align with your unique circumstances.

Don’t leave your financial future to chance. Contact us to discuss your pension options.