It’s been almost five years now since the world of pensions was turned on its head.
Pension freedoms, which was introduced by then-Chancellor George Osborne, completely revolutionised the way older people can use pension pots they have squirreled away over their lives.
No longer were they pushed towards purchasing annuities that offered increasingly poor value for money.
Instead, pension savers could use their pension cash in any way they pleased, dipping into it as and when it suited them and withdrawing it at whatever rate they liked.
The trouble is, there is mounting concern that some people have been a little too eager in getting their hands on that cash, exposing them to the risk of ending up penniless in their old age.
Pension freedoms: all you need to know
Too early to judge
According to a new report from the Association of British Insurers (ABI), we should be a little wary about the rate at which savers are dipping into their pension pots.
Huw Evans, the trade body’s director general, suggests the “jury is still out” on whether pension freedoms have actually been a success.
He argues that we will only have a true idea in the decades to come, once it’s clear whether those who have made use of the freedoms have got the retirement they hoped for.
For example, full withdrawals of pension pots hit the highest point since pension freedoms were introduced, with more than 350,000 pots entirely emptied in 2018/19.
Even those who aren’t taking out the lot may be overdoing it.
The ABI reckons that on average, withdrawing 3.5% from a pension pot each year should ensure you have a 95% chance of not running out of money in retirement.
But around 40% of pensions that were dipped into last year were at an annual rate of 8% or more. That simply isn’t going to be sustainable for most people.
When pension freedoms were first introduced, critics warned there could be pensioners who blow the lot of fast cars and expensive holidays.
And while this hasn’t exactly happened, it is understandable to worry that some are still pushing the boat out beyond their means.
Everything you need to know about pensions
Opening the door to scammers
It’s not just a concern that people are taking money out of their pensions to splash out on expensive items or experiences, either.
The pension freedoms have also opened the door for scammers, with millions stolen from older people who have been talked into transferring their deals or ploughing their cash into all sorts of weird and wonderful nonsense.
The way the Government has dragged its feet over taking this seriously, in implementing a proper cold calling ban, has been utterly farcical.
And it has led to more people putting their chances of a comfortable retirement in danger, simply because they have been given the chance to make massive decisions about their pensions – without real safeguards or guidance to help them avoid costly mistakes.
Pension freedoms: 5 things to consider before dipping into your funds
Putting things right
So how do we adjust the current setup, to ensure that people make better decisions about how to handle their pension pots?
The ABI has made a host of suggestions here, which include:
- Adapting rules on guidance and advice, so that insurance providers can say and do more to help savers make better decisions
- Requiring defined benefit schemes to send a letter outlining the risks to any scheme member who wants to transfer their money into a defined contribution scheme
- A ‘later life review’, which should be developed by the Money and Pensions Services to help people plan during their retirement
- The Government setting up a Retirement Commission to advise on policy changes which will help people enjoy a better retirement
At the heart of this is the fact that people can make such enormous, impactful decisions about how to handle thousands of pounds essentially on a whim.
There are many reasons why people may be a little reticent about speaking to a financial adviser. There is a fee to pay for a start, and there may be a level of distrust around advisers.
But we aren’t talking about opening an ISA or switching a credit card, decisions that you can make on your own. And even if they go wrong, you are unlikely to end up significantly worse off.
No, this is about the pot of money you need to make last until you die, that needs to help you get through those later years when you won’t be in a position to simply try to find a better paying job.
So, spending a bit of money on getting a bit of help to ensure that you don’t end up destitute in your old age is likely to be an incredibly sensible investment.