Two years on from the introduction of pension ‘freedoms’ or pension ‘flexibility’, the Financial Conduct Authority (FCA) has examined its impact and is worried about the lack of advice.
Brought about in April 2015, in theory, since then it has been possible from age 55 onwards to withdraw your entire money purchase pension fund as a lump sum – albeit generally 75% would be taxable as income.
When the proposals first emerged concerns were expressed that the temptation to take a pot of cash and spend it would be too great for many – remember the phrase Lamborghini pensions (coined by the then Pensions Minister, now Sir Steve Webb)?
The FCA has examined what has actually happened since 2015 and in July published an interim report on its findings, revealing that over half of the pension pots accessed since April 2015 had been withdrawn in full.
As always, while this grabbed the headlines, it doesn’t tell the whole story because 60% of those pots were worth less than £10,000 and another 30% were below £30,000. That really doesn’t suggest that concerns about people blowing their pension funds on a new Lamborghini have been realised (a 2007 ‘Lambo’ Gallardo is in AutoTrader at £68,000 today and new – £170,000 plus). Indeed, the opposite seems to have happened in that over half of those who fully cashed in their pension reinvested the proceeds in other savings or investments.
As the FCA itself has noted, such a move can “…give rise to direct harm if consumers pay too much tax, or miss out on investment growth or other benefits”. That danger highlights another FCA concern and that is that many people are failing to take advice about their pension flexibility options. In the FCA’s own words, they are choosing “the path of least resistance” and opting for drawdown with their existing pension provider. The regulator says that the lack of shopping around this implies “may result in [the unadvised] achieving poorer deals”.
If you are considering drawing money from any pension arrangement, you should heed the FCA’s emphasis of the benefits of shopping around and taking, preferably Independent, financial advice. DIY pension planning can turn out to be an expensive option, even if at first sight it looks the easiest.
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Please Note: The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
