7th April 2016 at 4:52pm
Many predicted that the introduction of greater flexibility for pensions in April 2015 would result in a spending spree on fast cars.
This hasn’t come to pass but the much talked about ‘Freedom & Choice’ has made it possible for people over the age of 55 to do a wider variety of things with their pension money.
Most are taking a sensible approach
Yes, there have been examples of speedboats and foreign holidays but, more usually, we hear of people paying off their mortgages, high-interest debts, or funding their children’s further education.
Around £6bn has now been taken out in pension lump sums and drawdown payments since April 2015…
But, increasingly, we’re seeing people simply want an income in retirement. Oddly, some commentators seem surprised by that!
Standard Life had over half a million pension customers who could have withdrawn money from April last year, but only around 1 in 10 has chosen to do so. Of those who have, some have been cashing in small pension pots, often under £20,000, with others taking only their tax free cash – 25% of their pension pot.
Almost 10,000 of them have taken their pension benefits online during 2015, and more than 200,000 people have used our online retirement tools to work through their options.
The taxing issue
The reality is relatively few people have fully cashed in larger pension pots (those worth over £50,000) due to the tax they would need to pay.[i]
Research from Experian[ii] has also shown that almost half of those who withdrew their entire pension savings in one go, actually plan to invest it again elsewhere.
I sincerely hope they aren’t being tempted by people offering so-called ‘stellar’ returns from high-risk investment projects; everything from holiday homes (that probably haven’t been built yet) to fine wines (which have probably long since been consumed)!
More likely, perhaps, many of those taking their pension savings are putting the money into their bank account and leaving it there to use as required.
That’s fine if you plan to take it out over the next two or three years, but any longer and the risk of losing pace with inflation starts to take hold.
According to the Association of British Insurers (ABI), around £6bn has now been taken out in pension lump sums and drawdown payments since April 2015. However, over £7bn of pension assets have been reallocated to drawdown policies (where the money remains invested and can be drawn upon at any time) and annuities (where an insurance policy is used to secure a guaranteed lifetime income).
Actually, annuities are not dead
Many had predicted the complete demise of annuities when the new pension flexibility was announced but, interestingly, more annuities were bought in the last three months of 2015 than drawdown policies.
In fact, it’s been a fairly equal split since April 2015, with just over 60,000 people choosing each.
Many people are also talking about how the money can be passed down to their children or grandchildren. While no-one wants to consider their own demise, it’s reassuring to know that the fund can be passed on as a lump sum, usually tax free, where someone dies before the age of 75 (it’s taxable as income after age 75).
It’s a great way for people to ensure their inheritance arrangements, including those who are concerned about their young ones ever getting on the first rung of the housing ladder.
It’s all about choice
Finally, the recent Budget heralded the concept of a Lifetime ISA as a new way for people under 40 to save for that elusive deposit on a first home.
Someone said to me the other day they’d use it to “get rid of the kids”. What I hope they meant is that, as parents, they would ‘help fund a Lifetime ISA in order that their children could afford to move out of the family home.’
We will watch the development of the Lifetime ISA with interest as we move towards its launch in 2017.
Of course, all of this is just numbers. In reality, people are individuals and have individual circumstances that they need to deal with. Individual aspirations they want to fulfil.
Overall, the last year has seen a real change in the conversations our people are having with our customers. What was once a largely transactional discussion about a limited range of options at retirement has extended to something more in depth and something far more meaningful about people’s life choices.
It’s crucial that we never lose sight of that.
Do bear in mind that laws and tax rules may change in the future and the information here is based on our understanding in March 2016.
Personal circumstances also have an impact on tax treatment. Investments can go down as well as up and you may get back less than you pay in. The information in this blog or any response to comments should not be regarded as financial advice.
[i] Standard Life analysis, January 2016 (GEN2157).
[ii] Experian research, September 2015, ‘42% of people who withdrew all of their pension in one go would invest it.