Introduced back in 2014, Pension Freedoms legislation completely changed the retirement landscape, giving you greater flexibility over how and when you take your retirement benefits.
From the options you choose to how you manage your pension income, flexibility has meant greater choice, but more responsibility too.
Now, as the legislation turns 10 years old, keep reading for your look back at a decade of Pension Freedoms and what the changes mean for you.
George Osbourne introduced the new measures back in 2014
Pension Freedoms legislation arrived back in 2014. Then-chancellor George Osbourne set out his plans to give pensioners “complete freedom to draw down as much or as little of their pension pot as they want, anytime they want”.
In so doing, he irrevocably altered a pension landscape that had, until then, been heavily angled toward the traditional annuity.
The new measures introduced flexi-access drawdown and lump sums (known as an “uncrystallised fund pension lump sums”) that gave retirees more responsibility over budgeting.
Your pension is designed to pay an income for the rest of your life. While an annuity provides a known and guaranteed income, there were concerns that greater flexibility would lead to poor budgeting and retirees running out of money. There were also worries about the death of the traditional annuity. Were these fears unfounded?
A robust financial plan and expert advice can help you to manage flexible withdrawals effectively
After decades of diligent saving, it can be easy to underestimate the difficulties that pension decumulation presents.
And while flexibility can be a great tool, allowing you to live the retirement lifestyle you want, it makes budgeting for the rest of your life that much harder.
Thankfully, professional financial advice can help. Here are just three factors to consider:
1. External factors like inflation can affect the withdrawals you make
High inflation following the coronavirus pandemic (among other factors) led to soaring energy bills and the cost of living crisis.
Rising costs can erode the buying power of your pension pot. Market dips, meanwhile, could see you sell more units to achieve the same level of retirement income. Both of which can lead to your pot being depleted faster than anticipated.
Speaking to a professional can help you consider the potential effect of wider market conditions on the decisions you make. With decades of experience dealing with retirement and the markets, we can help.
2. Those taking lump sums will need to consider the tax implications
The flexibility of lump sums means that you can access large amounts of cash in one go. This is great news if you have one-off purchases to make, but there could be tax implications.
Large withdrawals can move you into a higher tax bracket, especially in the current climate of frozen thresholds and allowances. Consider the size of the withdrawal you want to make and the timing too. It might be more tax-efficient to split the payments over two tax years, for example.
Emergency tax might also be an issue. Lump sums are generally taxed as though the payment is the first of 12 payments of the same amount.
This can lead to a high tax charge initially and while this can be claimed back, the process might take time. You could have to wait until the end of the tax year, an issue if you need the proceeds to make a time-sensitive purchase.
3. You might need to budget for decades as life expectancies rise
While an annuity provides a guaranteed income for the rest of your life, if you flexibly withdraw and spend your pension pot, you could run out of money when you need it most.
Be sure to factor in increasing longevity, which means that your pension pot might need to last three decades or more.
A robust financial plan can help you make sure you don’t run out of money, while also budgeting for later-life considerations like care.
After an initial dip, improving rates mean that annuities remain popular
Back in 2014, with rates low, annuity sales suffered a dip in the aftermath of Pension Freedoms. Since then, though, annuity take-up has increased.
FTAdviser confirmed back in October 2022 that rates had increased by 52% during the previous nine months. The rise marked a 14-year high.
The report went on to confirm that the break-even point – when you’ve received your original pension amount back through income – had reduced to just 15 years.
Mixing an annuity with Pension Freedoms options could be a useful way to manage your pension decumulation. Regular income can cover known expenses like a mortgage or household bills, with flexible options used to cover one-off luxuries.
Get in touch
Pension Freedoms has been an enormous success but if you have any questions about your retirement options or pension decumulation, get in touch. Please email hello@globeifa.co.uk or call us on 020 8891 0711 to discuss how Globe IFA’s expert financial advisors can help you manage your long-term financial plans.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
