One year on from pension changes

30th March 2016

One year on from the introduction of the pension freedoms, WEALTH at work, a leading provider of financial education in the workplace, supported by guidance and advice, highlights what has changed for defined contribution (DC) scheme members and what the future could hold for the pensions market.

The pension changes have brought a whole new range of options to consider. Individuals now have to think about whether they want an annuity, drawdown, to take a cash withdrawal or a combination of options; when to access their pension; if it is better to use savings first before drawing their pension; and the list goes on.

Making the right choices in the lead up to and at the point of retirement is no simple task and getting it wrong could be extremely costly. However, it seems many individuals don’t really understand the consequences of these options.

Initial survey findings from the Pensions and Lifetime Savings Association (PLSA) found that of those who were planning on using income drawdown, some pension savers thought there were no risks with drawing a regular income from their pension, and over half thought it would provide a guaranteed income in retirement. Yet despite these misunderstandings, more recent findings from the PLSA highlights that only a minority of people paid for advice.

Despite some reported inaccuracies in the data collected by the Financial Conduct Authority (FCA), it is still reasonable to assume that the initial findings are a fair reflection of what is happening in the retirement market. It found that of pension funds which had been fully cashed out, the majority of these had values of less than £30,000. It also found that even some very large funds had been fully cashed out; presumably triggering a hefty tax bill and a shift towards more self-managed income drawdown i.e. without the help of a regulated Adviser. In addition, new research from the PLSA suggests that many may take income from pensions to simply re-invest into cash, stocks or shares.

Jonathan Watts-Lay, Director, WEALTH at work, comments, “It is a concern that pension funds are being cashed out to only be kept as cash or to be reinvested. It seems many don’t understand that a pension allows funds to grow tax free and also has inheritance tax benefits.”

Watts-Lay concludes, “It is too soon to say whether early behaviours become the long term norm. However with a secondary annuity market on its way, robo-advisers claiming they have the answer and a possible melt down in the world of defined benefit, what we are confident about is the greater need for financial education, guidance and advice than pre pension freedoms, and this isn’t likely to change any time soon.”