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Two years on from the pensions revolution are people taking advantage or taking risks?

The pension reforms introduced in 2015 have given those aged 55 years or older greater flexibility to access and use the funds in their pension ‘pots’. After two years an interesting and mixed picture is emerging about how people are taking advantage of these new freedoms to drawdown their pension funds.

There is certainly evidence that many are dipping into their pension pots with the Association of British Insurers (ABI) claiming that circa 100,000 are doing this each quarter. The ABI does, though, point out that 4.7 million of those eligible have left their ‘pots’ intact, indicating that only a minority are utilising the new pension freedoms. However this still means that relative to the position prior to the 2015 reforms twice as many people are now using pension drawdown instead of using their funds to buy an annuity which provides an income for life.

The good news is that the evidence indicates that the majority of those that do access their pots are behaving sensibly by using the money for other investments including property or to pay down debts or for home improvements. Only a minority appear to be using their pension money frivolously.

The bad news, though, is that an increasing proportion of those who do access their pots are doing so without taking financial advice. The Financial Conduct Authority (FCA) reports that 30% of those drawing on their pension are doing so without taking financial advice – this compares with 5% prior to the reforms. Additionally the FCA has found that the majority of those who are drawing on their funds are using their existing pension provider rather than shopping around for the best deals.

The reluctance of many to take professional financial advice about their pension may be related to the costs involved which can amount to thousands of pounds. But given the complexities involved - particularly in respect of the tax liabilities that can arise through poorly timed and ill-considered drawdowns - accessing pension pots without taking advice is imprudent. At the very least those accessing their pension pots need to ensure that the pace of the drawdown and the use of funds drawn does not risk the money saved for retirement running out prematurely.

So the pension reforms do indeed provide greater flexibility - but good, and well-informed, planning is required to avoid the risk of income poverty in retirement.

Martin Upton

Director, True Potential PUFin

19th July 2017

About True Potential PUFin

True Potential PUFin is based at the Open University Business School in Milton Keynes, UK

True Potential PUFin is the first and only personal finance research centre in the UK that has an active teaching programme freely available to the public. Supported by the University’s excellence in delivering distance learning, the Centre is uniquely positioned to develop the public’s financial capability and to research the impact and effectiveness of its education programme.

This blog has also been posted to Personal Finance Today and Investor Today

 

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