The Government announced yesterday that 60,000 people used the
pension freedoms and £1bn was paid from pension schemes to individuals since
the freedoms were launched in April 2015. This is being hailed as a success by
the Government, but is it?
This is an average pot size of c£17,000 being paid out. Of course
it is likely there’ll be a range of payments across a bell curve of sizes but
it is clear that this is something that will have impact on the smaller pot
sizes. What could someone have done with a pot of £17,000 before April? Not a
lot. Buying an annuity would have been the only option and a paltry income of
around £560 pa would have been provided. So on the face of it those people may
have benefitted from the changes, provided they use the money wisely now.
Some of these people may end up on state benefits, or be on state
benefits. Taking benefits in a flexible way can result in the state acting as
if you still have it or that you used it to buy an annuity. The upshot being
that short-term spending of the fund could result a long term impact on the
state benefits they could have been entitled too.
It is possible these “early adopters” were the many individuals
delaying buying an annuity in anticipation of the changes and so while £1bn may
seem a lot it was around the normal amount paid over a similar period to buy an
annuity when that was the main option.
We don’t know what the tax take on this was, but when the
Government talk about success it is surely with one eye on some more money into
the coffers in income tax. It is also slightly different in the annuity days
when £1bn would have remained locked away this has been released to spend. It
would be interesting to see the impact on over 55s spending habits. What have
they been doing with this money?
We also don’t know the ages of the people accessing these funds.
Is it possible these are younger than the 65 year olds that access their funds.
This early use of pension benefits, albeit small now, could have longer term
ramification on those that in ten to fifteen years realise their pension funds
are now too small to retire on as they used it to early.
So success or not? Success is a funny word to use when we only
know the number of people and the number of pensions paid in total. Especially
when the amounts mirror the pre freedoms world. People retire and need money to
live on all the time. I accept it is politics but by any measure success surely
cannot be determined yet. Have these people made use of Pension Wise? Have
those that didn’t taken independent financial advice? Have they taken a wise
decision? If yes, success. Have these people blown their nest egg too soon?
Have they racked up a big tax bill? Have they inadvertently triggered the MPAA
to their detriment? If yes, not successful I would say. Sadly, we may never
know these answers before it is too late.
David Brooks
Technical Director
Telephone: +44 (0)20 7893 2262
Email: david.brooks [@] broadstone.co.uk
