The effect of Pension Freedoms


The effect of Pension Freedoms

The Financial Conduct Authority, (FCA), has published a document giving quite a bit of data about the uptake of Pension Freedoms over the first 3 months they were accessible, from April 2015 to the end of June. The document is available at https://www.fca.org.uk/static/documents/pension-freedoms-data-collection-exercise.pdf if you would like to see it.

The FCA give a few headline figures that emphasise just how big a change there has been in the pension environment; with 204,581 pension policies being accessed compared with 95,372 in the same period in 2013 and only 12,418 annuity sales in 2015 compared with 89,896 in the same period in 2013.

Back in 2013 there was essentially only 2 games in town, buy an annuity or get a drawdown contract, but a drawdown was generally restricted to pension funds over £100,000, as the costs were considered to outweigh the benefits for smaller pension pots.

From April 2015, there were 3 choices; annuity, drawdown, (with the proviso that £50,000+ is the new sweet-spot), and the Uncrystallised Fund Pension Lump Sum or UFPLS, (often said out loud as Ufflepuff). The practical upshot for a pensioner can be summarised as:

1.             Annuity = secured income for life with minimal chance of moving cash between the generations. Usually considered “risk-free”, although inflation could be a problem.

2.             Drawdown = unsecured income, hopefully for life, with some chance of moving cash between generations. An element of investment risk gives both income and capital maintenance.

3.             UFPLS = All your money now, (less tax), to blow or hoard as you see fit!

Unsurprising to the cynics amongst us, option 3 has proved to rather popular, with 57,568 taking the full amount of their pension as cash, with 10,237 of those with more than £30,000 to blow including 137 people with more than £250,000 to hoard or spend.

Now, the press and the politicians made a big fuss about how it put control back into the hands of the public, but I wonder just how true is that? If you are at or around the poverty line, then using an UFPLS to pay off or pay down debt may be the most sensible thing you can do, but I fail to see the element of choice! For the person not in debt, then where is the advantage of taking pension money as cash in one go?

The tax treatment for an UFPLS is unsubtle; 25% tax free with the balance treated as taxable income in the tax year it is received. Consequently taking £250,000 as an UFPLS in 2015/16 will cost you at least £65,748 in tax, (assuming you have no other income). What then will you do with the £184,252 you have left?

Deposit it in the bank at 2% less tax?

One expensive sports car?

Pay for your expenses for the rest of your life by investing in a balanced portfolio of investment grade assets?

But isn’t that a drawdown plan? Something you could access without blowing £65,748 on an unnecessary party down at HMRC?

Here is one situation where a small amount of financial advice goes a very long way and where people should be careful what they wish for. Choice only works for those who know everything they need to and understand the pitfalls that exist.

If you would like to know more about how we can help you plan and realise your financial goals then contact us at info@martin-redmanpartners.co.uk or call us on 01223 792 196.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.