The pension freedom reforms may have only come into force in 2015, but there is little doubt their impact has been significant. Savers have overwhelmingly taken advantage of the new rules first announced by George Osborne in 2014. No longer restricted by compulsory annuitisation, figures from HM Treasury show almost £11bn has been withdrawn from pensions over the past two years, and the real figure is likely to be higher given that reporting was optional when freedoms were first introduced.
Greater flexibility, combined with annuity rates that remain near historic lows, has also precipitated a significant slump in annuity sales and pushed a number of providers out of the market altogether. But more recently there have been signs of a slight uptick in interest, helped along by an improvement in rates. Roughly 80,000 people still invest a collective £4.5bn in buying an annuity each year. Predictions that the freedoms would kill off the market completely now look exaggerated at best, but the number now opting for drawdown arrangements has risen sharply nonetheless.
For all the noise about the perils of pension freedoms, most notably the idea that unadvised savers would jump at the chance to blow their entire pots on expensive cars and other frivolous purchases, savers seem to have held off from blowing their retirement income for the most part. In fact, Chart 1 (over page) shows that, according to HM Revenue & Customs figures, the average withdrawal per person has more than halved since the second quarter of 2015, when the figure stood at £18,571, to £9,034 as of the start of 2017.
Financial education
But although the numbers suggest that savers are becoming more sensible about their retirement income, some observations imply otherwise. According to asset manager Fidelity International, 41 per cent of over-55s who have accessed their pension since the freedoms came into play put their cash lump sum in a current account, despite the fact 73 per cent of “those who had accessed cash and gone into drawdown [said] that low interest rates were the biggest worry for their pension monies”.
Chart 2 (over page) shows the breakdown of retiree behaviour since retirement freedoms. A dearth of financial education, combined with added responsibility and the advice gap, were expected to lead to relatively misinformed decisions by savers, and Fidelity’s figures demonstrate that savers’ concerns are contradicted by their actions when it comes to their pension pots.
Meanwhile, of those who have moved into drawdown, around a third have done so without seeking advice, according to the FCA. Kusal Ariyawansa, financial planner at Manchester-based Appleton Gerrard, believes that more state- funded guidance is needed around pensions and personal finance.
“What the government really should be doing is paying [financial services professionals] to go into schools and organisations to speak to people and show them the way forward. Just by showing someone the safe withdrawal rate, I’ve had people change their mind once they understood the risks,” Mr Ariyawansa explains.
Longevity of pension pots Concerns about the sustainability of retirement income since the advent of pension freedoms have become more pronounced as life expectancy figures continue to rise. The Office for National Statistics’ (ONS) latest life expectancy data, which, it should be noted, doesn’t include continuous mortality improvement data (for example information on improvements in mortality rates as time progresses), predicts that those currently aged 65 are likely to live to 83 if they are male and 86 if they are female.
