Published: 16 April 2019
The world of retirement income has changed dramatically since then Chancellor of the Exchequer, George Osborne, announced a shake-up of the rules around accessing pension savings in March 2014.
Five years on, and four years since the new rules actually took effect, some would argue the dust has still to settle fully. From rapid changes to the way retirement savers now choose to take their incomes, to a sharpened focus on advice and guidance to support decision-making.
On the face of it, what George Osborne set out in his Budget on 19 March 2014 might not have seemed that radical. Broadly speaking, the measures meant that members of Defined Contribution (DC) pension schemes would now be allowed to access their entire pension pot from the age of 55 if they wished, without incurring heavy tax penalties.
Up to 25% could be taken tax-free as before, with the remainder now taxed at the saver’s marginal rate instead of what, previously, would have been a penal rate of 55%.
But for retirement savers and those working in the pensions field, this was massive news. While 2011 had already seen the scrapping of compulsory annuity purchase at age 75, the 55% tax penalty for taking money flexibly out of a pension pot above the 25% tax-free lump sum meant that, for many, using their pot to buy an income for life still remained the only practical option.
Drawdown plans were subject to various controls and tended to be seen as the preserve of an affluent minority who were willing and able to remain invested in retirement, usually with the support of a financial adviser. That has now changed dramatically, as we’ll see.
While the increased flexibility was welcomed by many, the reforms also sparked a long (and ongoing) series of rule changes, market reviews, inquiries and consultations aimed at managing the risk of potentially associated consumer detriment.
The Financial Conduct Authority (FCA) has looked at different areas. These include the implications for consumers of transferring valuable guaranteed benefits out of Defined Benefit (DB) pension schemes to access more flexibility; of managing drawdown pots without advice; of the impact of charges and their disclosure; and of the quality of the communications they receive.
The FCA’s most recent proposals – currently out for consultation - include ‘investment pathways’ to be offered to savers who choose to stay invested and manage their own income drawdown, who do not take 'regulated' financial advice. The idea is that they would have four investment objectives to choose from, with an appropriate pathway matched to the selection they make.
The FCA and the government are also trying to tackle an increase in pension scams - such as ‘free pension reviews’ that persuade savers to invest their pots in often unsuitable, high-risk and usually unregulated investments. Victims of pension scams lost an average of £91,000 in 2017, according to Action Fraud1. A ban on cold calling finally took effect in February 2019.
Five years on, it’s clear the implications of George Osborne’s flagship pensions reform are numerous and will continue to influence the retirement landscape for years to come. Here’s our round-up of some of the key impacts they’ve already had.
Flexible use of retirement savings is now the mainstream option. FCA figures show that twice as many flexible drawdown plans are now set up as annuities are purchased2.
More savers are going it alone. A third of drawdown plan set-ups are also now non-advised, according to the FCA, compared with just 5% (one in 20) prior to the freedoms3. This is an area that the Retirement Outcome Review is looking to address.
Withdrawal levels are relatively high. The FCA also found that over half of people accessing (albeit mostly relatively small) pots in the first two and a half years of the freedoms took all the money out4. While other industry analysis found at least four in 10 taking out over 10% of their fund a year5.
A lot of money has been moved out of Defined Benefit schemes. Almost £21bn was transferred out of these schemes and into DC pension pots (from which the freedoms can be accessed) in 2017 alone6. Concerns over unsuitable advice in these cases, and associated losses for the victims, has now led to a crackdown by the FCA7.
The pension dashboard is on the way. The idea of a pension dashboard has been discussed for several years, but the freedoms, along with technological advances, gave impetus to the development. The government is currently consulting on how dashboards will look, function and be governed. Savers will (hopefully) soon be able to view all their retirement savings in one place, including their workplace, personal and state pensions.
This is provided for general information only and takes no account of personal circumstances. It is not a recommendation to buy or sell. It is provided solely to support you in making your own investment decisions. If you have any doubts as to their suitability you should seek expert advice. Alliance Trust Savings does not give financial or investment advice.
Laws and tax rules may change in the future without notice.
Please be aware that the value of investments can fall as well as rise so you could get back less than you invest.
1 TPR - Scam victims lose more than £1m each to fraudsters - 28 Jan 2019
2 FCA – Retirement Outcomes Review Interim Report – July 2018 (pages 3-4)
3 As for note 2
4 As for note 2
5 AJ Bell - Pension freedoms three years on - new analysis - 27 March 2018
6 FT - Record number of savers abandon final salary pension schemes - 18 May 2018
7 FCA - FCA confirms final rules on improving the quality of pension transfer advice - 4 October 2018
Alliance Trust Savings Limited is a subsidiary of Alliance Trust PLC and is registered in Scotland No. SC 98767, registered office, PO Box 164, 8 West Marketgait, Dundee DD1 9YP; is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, firm reference number 116115. Alliance Trust Savings gives no financial or investment advice.