It was a year ago that the biggest pension shake-up seen this generation came into force. Whilst there hasn’t been quite the stampede of people determined to withdraw every penny from their pension early, to splash out on a hot tub or luxury cruise, the statistics from the last twelve months suggest that those who have taken advantage of the changes could have been a little more prudent.
HMRC have reported that approximately 188,000 people have accessed their pension savings since April 2015, and that the average amount withdrawn has been £18,600. A quick calculation gives an amount of close to £3.5 billion transferred out of pension pots and back into the UK economy.
The way that people are choosing to access their pension is changing too. Previously the most popular way of accessing pension pots, partly because it was the only option for many, annuities were purchased by just 13% of people. Drawdown schemes were taken up by 30%, whilst the most popular was the uncrystallised funds pension lump sum (UFPLS) – which allows the investor to withdraw from their pension savings directly, which 34% of people opted for.
That the UFPLS method has been chosen most often may be an indicator that some are hastily accessing their pension pot without seeking financial advice beforehand. Whilst the attraction of a straightforward withdrawal is obvious, there are some potentially negative factors to consider as well. The UFPLS approach lets you take several lump sums, and 25% of each is tax free.
However, as you are withdrawing from your existing pension pot designed to build up your savings, it may not be structured in the right way to provide an income. A drawdown scheme meanwhile is designed for generating regular income, and so would most probably be a better alternative to last for the long term. Both UFPLS and drawdown have the drawback of depletion if the stock market performs poorly. An annuity doesn’t have the same flexibility, but does guarantee a secured lifetime income.
Even though annuities suffered a serious drop in popularity immediately after the pension freedoms came into effect, they have made something of a comeback. With 21,200 annuities sold in comparison to 19,700 drawdown schemes at the close of 2015, the numbers suggest annuities have overtaken drawdowns in popularity.
Perhaps of greatest concern is the reasons pension pots are being accessed. One in five people who made a withdrawal from their pension in 2015 said it was at least partially to pay off debts. Whilst debt management is always a good idea, doing so at the expense of saving for your retirement could be regretted later in life.
Whether you’ve accessed your pension through the new freedom to do so or not, now is a good time to get some advice on your next move regarding your pension pot. Any decision – even if it’s to leave things as they are – should always be taken after proper financial counsel.