Pension freedoms one year on: did Briton’s retirees splash out on Lamborghinis?
The introduction of the new pension freedoms in April 2015 marked a complete overhaul of the retirement landscape by giving people approaching retirement unfettered access to their pension pots.
The government announced the new rules in the 2014 Budget and they came into effect on 6 April 2015.
They gave anyone aged 55 and over the ability to access as much of their pension savings as they want. The first 25% can be withdrawn tax-free and the remaining 75% is subject to the person’s marginal rate of income tax.
Pension freedoms gave retirees more flexibility and effectively removed the requirement for them to buy much-criticised annuities.
Retirees to blow money on Lamborghinis?
Critics warned the radical changes would lead to retirees cashing in their entire pension pots to make frivolous purchases. Then pensions minister Steve Webb said he was “relaxed” about how people spent their money and it was their choice “if they bought a Lamborghini”.
However, the total number of people cashing in their entire pension pot has in fact fallen each quarter since the rules were introduced, according to Financial Conduct Authority (FCA) figures.
The number of people accessing their retirement pots for the first time has also fallen every quarter.
In its latest Retirement Income Market Data report, the FCA said 65,610 pension pots had the cash fully withdrawn by new customers, down from the 113,100 recorded in the previous three months between July and September 2015.
Immediately after the introduction of pension freedoms, FCA stats reveal 120,969 pots were fully cashed out between April and June 2015, but 88% of full withdrawals involved pots of less than £30,000.
Death knell for annuities?
The pension reforms were also heralded as the final nail in the coffin for annuities, which had come under intense scrutiny following an FCA investigation revealed many pensioners had picked the wrong plan and failed to shop around for the best deal.
While FCA stats show the number of annuities purchased between October and December 2015 fell to 21,289, down from the 23,385 recorded in the previous three months, The Association of British Insurers (ABI) recently found that annuity sales were starting to see a revival.
In a March 2016 report, the ABI said sales of new annuity products were nearly on par with drawdown schemes, which allow savers to take out regular amounts of money while their money remains invested.
In the most recent quarter (Q4 2015) annuities proved more popular with new customers than income drawdown products with 21,200 sold, worth £1.1bn, compared with 19,700 drawdown policies worth £1.4bn.
This revival may not come as a surprise seeing as a study released at the end of last year revealed a guaranteed retirement income is still number one priority for the over 50s.
Positive attitude to retirement
One year on from the freedoms, and it seems people’s attitudes towards the new rules are still mostly positive.
A study of 10,000 people by Prudential found 44% were positive about the greater degree of flexibility they now have over access to their pension savings and 41% were happy they can now take more responsibility for their retirement finances.
But those planning to retire this year are also approaching the new freedoms with caution. Nearly three-fifths (59%) said the changes haven’t yet led them to alter their plans for taking an income from their pension savings, while nearly half (49%) said the pension freedoms haven’t had an impact on their attitude to retirement, as they are not sure the rule changes will last.
Insurance company LV= warned the increased choices from the freedoms were making retirement even more complex and many retirees were not getting the advice they needed. Of the 1,000 people surveyed by the firm, only one in five will take regulated advice when they retire, while just 14% said they’ll use the government’s Pension Wise service.
The firm said with the large numbers of people not taking advice, it could lead to a ‘mis-buying’ scandal.