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Two years of pension freedoms has brought increased choice but hidden dangers

Andrew Tully, pensions technical director, Retirement Advantage
With freedom and choice comes added complexity and a picture is emerging of fewer people receiving advice, government coffers benefitting from the extra tax take, and people continuing to fall victim to scams.
Andrew Tully, pensions technical director, Retirement Advantage

Two years after the pension freedoms came into effect, Retirement Advantage comments on how the retirement income market is developing, cautioning that lessons still need to be learned to ensure people receive the best outcomes from their pension savings.

Andrew Tully, pensions technical director, Retirement Advantage, comments: ‘Pension freedoms are clearly proving popular with retirees, but there are pitfalls for the unwary. With freedom and choice comes added complexity and a picture is emerging of fewer people receiving advice, government coffers benefitting from the extra tax take, and people continuing to fall victim to scams.’

New research – why are people ‘cashing in’?

HMRC’s latest pension freedom statistics1 show that over 500,000 people have withdrawn a total of £9.2bn from their pensions using the flexible rules since April 2015, with an average of three payments per person.

New research2 from Retirement Advantage among over 55s who have used the freedoms to access their pensions flexibly shows how people are using this money:

· 28% spent the cash on home improvements

· 26% put the money in a savings account, while 19% invested the money elsewhere

· 19% went on holiday

· 13% bought a new car

· 12% paid off the mortgage or other debts

The research also reveals that 37% of people using the freedoms to access cash from their pensions have continued to pay into a pension, while 19% say their employer has. Worryingly, 67% of these people are completely unaware of the Money Purchase Annual Allowance (MPAA).

Andrew Tully said: ‘I doubt many Lamborghinis have been bought with the cash, but taking money out of a tax efficient pension to simply reinvest or put in a savings account, having paid tax on some or all of it, is a little mad.

‘Perhaps of more concern are the number of people who continue to work and pay into a pension, but are unaware of the money purchase annual allowance. This is likely to catch many out when the limit drops to £4,000 from 6 April this year.’

Higher tax take

In the recent Budget3, HM Treasury admitted the pension freedoms have raised far more tax than anticipated. It was initially estimated to raise around £0.3 billion in 2015-16 and £0.6 billion in 2016-17, although these estimates were subject to considerable uncertainty. In the event, the measure has raised £1.5 billion in 2015-16, while the latest estimate for 2016-17 is £1.1 billion.

Andrew Tully said: ‘This is a tax bonanza for the Treasury and, although a welcome boost to government coffers, will have been a nasty surprise for many people taking advantage of the new freedoms. Paying tax on withdrawals was predicted to act as a natural brake on retirees withdrawing too much too soon, but this clearly hasn’t been the case.’

Retirement Advantage is urging retirees to use online tools such as its pension withdrawal tax calculator, to understand the impact of tax rules on their savings:

Less people shopping around

The recent FCA data trend bulletin4 shows fewer people are receiving advice at the point of deciding how to use their pension savings. It reveals that 50,000 people a year (60%) are not shopping around, even though they could be receiving a better deal by doing so.

Andrew Tully said: ‘The new rules should not be licence for people to receive poor value. More choice means more complication and yet the trend since the freedoms is for fewer people to seek advice. We need to find a way to break the cycle, as there is a strong correlation between receiving financial advice and shopping around. This is important whether you decide to buy an annuity, use income drawdown or combine the two approaches.’

The FCA5 is working with the industry to incorporate annuity comparisons within illustrations, which will show customers how much they could gain from shopping around and switching provider before they purchase an annuity. The FCA is planning for implementation in September 2017.

Final salary transfers on the increase

Driven by record transfer values6, and the opportunity to better tailor benefits to personal circumstances, the market is seeing a huge number of people looking to transfer out of final salary pensions.

Andrew Tully commented: ‘Due to low gilt yields, many transfer values look very attractive at the moment, often with values above 30 times income, well above historic averages. Combined with the extra flexibility offered by the pension freedoms, it is no surprise people are consider moving out of a final salary schemes into drawdown or a combination of drawdown and annuity.

‘This has been an unintended consequence of the pension freedoms, and although clearly not right for everyone, can lead to better outcomes for some people.’

The ability to pass unused pension wealth to family is a strong driver for many people, especially when contrasted with the often poor level of death benefits available to those who have a final salary benefit with a previous employer. Similarly, those who are single, widowed or divorced may benefit from the ability to re-shape death benefits to suit their individual circumstances.

Final salary schemes lack flexibility, so a transfer can allow advisers to help customers control the amount of tax they pay, and gradually ease their way into retirement. When combined with the potential for greater amounts of tax-free cash and possible health issues, there are a range of reasons why a transfer may be worth exploring.

However, Retirement Advantage says it’s important to recognise many people are likely to be better off staying put, despite the obvious attractions which pension freedom offers. A guaranteed lifetime income shouldn’t be snubbed without careful consideration.

Pension scams still a danger

Although the move to ban pension cold calling is welcome, Retirement Advantage warns that pension scams are still prevalent and people should be constantly wary of unsolicited approaches, by email, phone or in writing. City of London Police figures show that £13.2 million was lost to pension liberation scams in the 12 months to February 2016 – an increase of 26% on the previous year7.Andrew Tully said: ‘Pension scammers are a modern day scourge, as reported fraud losses are counted in the millions. We must do more to help and protect people approached by conmen, and the ban on cold calling is an important step in the right direction.’

Retirement Advantage urges retirees to beware of:

1. An offer to help you access your pension savings before age 55. It is only possible to do this in rare situations, for instance if you are very ill, so be careful and always check with your pension provider.

2. A recommendation to take a large amount of money, or your whole pension pot, in a lump sum and invest it. There are significant tax implications if you take lots of your savings in one go, so check the tax position before you make any decisions.

3. Warnings that the deal is limited and you must act now. Choosing the right retirement income product(s) is a big decision and shouldn’t be done quickly or under pressure.

4. Being discouraged from seeking professional financial advice or talking to Pension Wise or The Pensions Advisory Service (TPAS). An adviser would be able to explain the rules and tax implications of different options and help you make the best choices for your personal circumstances, so be very suspicious if this is discouraged.

5. Contact by somebody who is not on the Financial Conduct Authority (FCA) Register. The Register is a public record of all the regulated firms and individuals in the financial services industry, including retirement income providers and investment companies (



2.Source: Research was conducted by Censuswide between 20.3.17 and 22.3.17. Online interviews were conducted among 250 people aged over 55 years who have used the flexible rules to withdraw cash from their pensions since the freedoms were introduced in April 2015.

3.Source: (please see page 49 – B.23)



6.Source: FT 28.12.16