Pension Freedoms – 5 Years On
In April 2012 pension freedoms were introduced, which gave people the choice about flexibly accessing their pensions. The rules meant that most people over the age of 55 (which rises to 58 in 2028) can choose to move their personal pension into a flexible drawdown or take out lump sum withdrawals known as UFPLS.
Both options allow you to control the amount of income drawn down and how often it is taken, but they work in different ways.
This allows you to take up to 25% of your pension as a lump sum that is tax free. You can then decide how you would like to invest the rest, and how much income you would like to take, but bear in mind that this income is taxable.
Lump Sum Withdrawals
With lump sum withdrawals 25% of the amount you withdraw will usually be paid to you tax free and the remaining 75% is taxable. You can decide how to invest anything left in your pension and make the more lump sum withdrawals in the future.
Before these new rules were introduced many had no choice but to swap their pension for a guaranteed income for life, otherwise known as an annuity.
How retirees access their pensions has changed – prior to the introduction of pension freedoms 90% of people were estimated to have purchased an annuity. Nowadays, 55% of retirees choose to encash their pensions altogether, with 34% opting to keep their pension invested using either flexible drawdown or taking lump sum payments. Only 11% of people today buy an annuity, according to data from the Financial Conduct Authority.
Flexibility has resonated with many people since April 2015 to January 2020, and retirees have opted for flexible pension withdrawals totalling almost £33 billion. The ability to draw as little or as much as you want from your pension does have some advantages, particularly with the rise of semi-retirement. More of us are now working part-time as we get older, rather than finishing working completely. Although this flexibility is attractive, many people value certainly and security in their retirement, so the amount of people who do not take an annuity is often seen as surprising.
However, pension freedoms and there have been seen and unforeseen consequences that followed the changes. Some of the consequences are detailed here.
If you have been benefitting from Pension Freedom’s but think you may have received bad advice, you can make a claim. Contact Money and Me to start your claim today.