Unintended consequences of pension reforms

18 Jan 2016 | Comment

Reforms in relation to occupational pension schemes were brought into place last year. These reforms allowed pensioners the flexibility to access their entire pension pots from the age of 55 and to receive up to 25% of that sum tax free.

At the time the reforms were introduced they courted controversy from many financial analysts who questioned how this money would be spent and whether the ability to take pension pots at such a young age would leave a number of pensioners impoverished in their later years.

Figures just released from the Financial Conduct Authority show that from May to September of last year, of the 378,000 pensioners who accessed their pension pot, two thirds withdrew their entire allocated funds. It is clear that the number of pensioners withdrawing the entire fund is significantly greater than the Government initially envisaged.

At the time of the reforms last year, Steve Webb, the then Pensions Minister, surmised that following the reforms pensioners would squander their savings on Lamborghinis and other luxury items.  There is no significant evidence to show this is in fact the case.  Instead, it seems that pensioners are withdrawing their pensions and either using the money to clear personal debts, purchase property or  to provide monies for  their children (by way of gift or loan) to enable them to purchase property or clear their debts.

One of the concerns held by the financial sector relates to pensioners’ ability to access the entirety of their pension in order to purchase annuities. Annuities, if purchased wisely, can provide pensioners with an income for life. Recent figures show that of the pensioners who withdrew monies between May and September last year, only 13% of them purchased annuities. This is a drastic reduction on the pre-reform days and causes financial experts considerable concern.   Of those who did purchase annuities, figures demonstrate that nearly 50% did not shop around and therefore are likely to have purchased the annuity that would provide them with the best short term return to the potential detriment of long term profitability. Given the financial impact that could result from an ill-informed choice when purchasing an annuity, it is strongly advised that any individual seeks independent financial advice before deciding on which solution best suits their needs, both for capital and income. The concern is that, in many cases, this advice may have gone unheard.

The recent statistics certainly suggest that whilst pension liberation has proved to be advantageous to a number of pensioners in the short term. However, there is an increasing likelihood that one of the unintended consequences of the reforms will be to deprive pensioners of a steady and sustainable income.

Hugh James provides a variety of advice in relation to occupational pension schemes. Should you require any independent financial advice then please do not hesitate to contact Suzanne Browne of Hugh James Independent Financial Advisers. Alternatively, Louise Price of our Employment and Pensions Team and Abigail Flanagan of our Pension Disputes team would be happy to assist with any queries or concerns you may have in relation to the Pension Scheme itself or any concerns you may hold in relation to the mis-selling of annuities.


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