Pension freedom to make a catastrophic decision?

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Former Pensions Minister Steve Webb famously announced that pension pots should be able to be used to buy Lamborghinis. The resultant legislation (Taxation of Pensions Act 2014) made this so. However the legislation is a typical ‘one size fits all’ and takes no account of the size of the pension pot nor the other assets which an individual may call upon to support themselves during their retirement.

As early as two months into the new regime and the pensions industry was awash with stories of the reported £1bn extra that Joe and Joanna Public had withdrawn from their pension pots (for which the Tax Man sends his thanks).

City regulator (the FCA) has published (Sept 15) the findings of its initial review of the impact and implementation of the new rules.

The FCA analysis only covers the first three months of the new rules but some significant findings come to light:

  • 204,581 people accessed their pension savings (95,372 the same period last year)
  • 57,568 people withdrew their entire funds
  • 53,543 people partially encashed their pension via pension fund drawdown
  • 43,094 people took the pensions under the ‘small pots’ payment regime
  • 17,912 people took their entire funds via the pension fund drawdown route
  • 16,872 people withdrew just the tax free pension commencement lump sum
  • 12,418 people bought an annuity with their pension fund

For a few people early access to pension funds is probably the right thing to do, but for many, maybe most, it may well prove to be catastrophic mistake.

The reality is that the new rules may extend some slightly changed freedoms, but whole subject is a tangled web of pros and cons which even most financial planners find challenging to keep abreast of.

The real concern should not be how many people are making catastrophic decisions, it is their right to expose themselves to greater challenges and adversity when they join the growing ranks of our elderly population.

The concern is the number of people making irreversible, uninformed decisions about really complex matters without taking proper advice. A recent survey queried a sample of 669 people aged 55 or over if they have or if they would pay for financial advice before making a withdrawal from their pension. Sadly, only 19% responded positively to this question whilst 31% where unsure, 50% said they would not pay for advice. Shockingly, 20% said they wouldn’t even accept the free (but limited) guidance (not advice) offered by the Government.

A very crude extrapolation of these figures suggests that a staggering 409,162 people each year run the risk of catastrophic financial ruin by not engaging with a regulated advice process.

There is a lack of robust research to apportion blame, but it seems fair to suggest that the tarnished pensions industry has not endeared itself to the newly empowered yet extremely vulnerable, silver-haired e-enabled generation, who ultimately will pay the price.

 


Paul Corner is a Chartered Financial Planner, award-winning university lecturer, adviser to the DWP’s Pensions Advisory Service and financial planning member of the ‘Resolution’ the Solicitor’s Family Law Association.Tax treatment and laws related to personal finances change on a regular basis. Any investments or financial products referred to are not endorsed, nor recommended. Discussion points raised in blog articles should not be acted upon without professional advice. E & O.E.

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