What price pension freedom?

Post by Mearns & Company in News

Inflation is driving many to raid their ‘rainy day funds’ to cover rising energy and fuel bills. But there are particular concerns that some older savers are also cashing in pension funds early to help make ends meet in the short term, with potentially long-term consequences.

Figures from the Centre of Economics and Business Research (Cebr) show that over the past six months 16% of adults used all of their savings and investments to boost their income to ensure they were able to pay essential bills. For those at or near retirement, such actions can erode the value of their pension savings.

Autonomy of choice

Under Pension Freedom rules, introduced in 2015, anyone aged 55 or over can currently access part or all of their pension funds. While a quarter of their fund can be paid as a tax free lump sum, withdrawals over this limit will be subject to income tax (unless the total income, including these payments, is below the personal allowance — currently £12,570).

Since the introduction of pension freedoms, savers have enjoyed largely buoyant stock market gains combined with low inflation, effectively allowing them to draw money from these pots without seriously depleting the remaining funds which continued to grow.

However, as a new report from actuaries AKG highlights, the return of high inflation and increased living costs could jeopardise many people’s future retirement plans.

Early pension fund withdrawals can lead to an unnecessary tax burden and the risk of running out of money later in life, an issue that is likely to be exacerbated by increased inflation.

The Bank of England is forecasting that higher than expected inflation could tip the UK into a long recession.

Advised steps

Those approaching retirement face complex decisions about how to use their pension funds and freedom. Far fewer people now choose to take an annuity, particularly before the age of 75, with most opting to draw down funds to supplement the state pension, while leaving the remainder invested. The question is what remains a ‘safe’ amount to withdraw to maintain funds through to later life?

Data from the financial regulator, however, suggests not enough people are taking this option.  Last year four out of ten people did not seek financial advice before accessing their pensions, the highest proportion since Pension Freedom rules were introduced.

Please do get in touch if you are thinking about the most suitable way to access your pension funds or for guidance on how your long-term pension planning might be affected.


The value of tax reliefs depends on your individual circumstances. Tax laws can change.

The Financial Conduct Authority does not regulate tax advice.

The value of your investment and the income from it 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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