Lessons from five years of pension flexibility

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It’s been five years since pension holders were given the freedom to draw directly from certain pension savings. What have we learned that can help those about to embark on their own retirement journey?

The pension reforms in April 2015 gave defined contribution pension holders “complete freedom to draw down as much or as little of their pension pot as they want, anytime they want,” according to George Osborne, the Chancellor at the time. After five years of the reforms in the UK – and many more in places like the US and Australia that have had similar rules for longer – we can draw some conclusions about the changes, and derive some lessons for the future.

Despite the sceptics’ warnings that pension pots would be frittered away on Lamborghinis or world cruises, leaving the State to pick up the pieces, it has not worked out that way. After an initial rush to fully encash pension pots, the average amount withdrawn per person quickly declined. By the final quarter of 2019, nearly four times more people were receiving flexible payments than prior to the reforms, but the average payment had fallen by almost two thirds.

However, there has been a continued decline in the purchase of annuities to provide retirement income. The latest data from the Financial Conduct Authority (2018/19) shows just 11% of pension plans being used to buy an annuity.

Flexible Pension Payments

Source: Official Statistics – Flexible payments from pensions (www.gov.uk)

Drawdown pros and cons

If you are at the stage when you are beginning to consider your retirement, there are some lessons to learn about pension drawdown:

 Whatever decisions you make about managing your retirement income, it’s a complex area. To make sure you understand your options clearly, it is imperative that you seek expert advice.

 

The value of your investments and the income from them can go down as well as up and you may not get back the full amount you invested. 

Past performance is not a reliable indicator of future performance. 

Occupational pension schemes are regulated by The Pensions Regulator.

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