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New Pension Freedoms Don’t Change the Underlying Principles

23rd November 2015

When the pension reform and the new pension freedoms were first announced, critics feared the changes would lead to irresponsible behaviour, with people taking money out as a lump sum, spend most of it and end up without sufficient income in later years.

More than half a year after the reform, statistics released by the Association of British Insurers suggest these fears have not materialised on a large scale, at least for now.

Pension Trends after the Reform
Contrary to some predictions, the annuity market is not dead. Buying an annuity to secure stable retirement income is still an attractive option for a large number of savers. In the first six months following the reform, £2.17bn has been invested in approximately 40,580 annuities (£53,300 on average): 18,200 annuities worth £990m in the second quarter and 22,380 (£1.17bn) in the third – the first quarter-to-quarter increase since 2012.

In addition to annuities, £2.85bn has been invested in 43,800 income drawdown products (£65,000 on average). This confirms that savers have generally remained responsible and understand what the primary purpose of pensions is – retirement income.

Compared to annuities and drawdown policies, the average lump sum has been much smaller (under £15,000, with £2.5bn total paid out in 166,700 lump sum payments). It appears that only smaller pots tend to be taken as lump sum, while larger ones are still being used to buy retirement income.

Approximately half of those who have bought an annuity or drawdown policy have chosen a provider other than the one they had been saving with. Knowing your options and shopping around does pay off and people know it, which is also a good signal to the market.

The News Is That Not Much Has Changed
The above mentioned figures suggest that the new pension freedoms have not changed the underlying principle of pensions being primarily used for retirement income.

At the same time, the key problem also remains unresolved and unaffected by the reform: Under the existing circumstances in the economy, labour market and financial markets, it is increasingly hard for a large number of savers to build a sufficient pension pot in the first place.

Saving for retirement is a long-term task and unfortunately it is affected by a number of external factors beyond our control. Low interest rates, many employers reconsidering their final salary schemes and increasing life expectancy are just some of the challenges. Few things are certain and some risks can’t be avoided, but there are several key principles of making sure your pension pot is as big as possible when you eventually need it.

How to Build a Sufficient Pension Pot
Saving for retirement should be among your top priorities regardless of your age. It is best to start thinking (and acting) about your pension as soon as you start working and have regular income. That said, if you feel you’ve been falling behind, it is never too late to start contributing more, change your pension scheme or change your lifestyle to be able to save more.

Significant tax and other benefits apply to pensions. Unfortunately, big part of these depend on who you work for, the particular pension scheme, your income and other personal circumstances. Furthermore, pension rules are far from constant in time. It can be hard to fully understand and take advantage of all opportunities.

At the same time, there are also risks, charges and tax implications to watch out for. Getting help from an independent financial adviser (IFA) pays itself many times over. Even the smallest amounts or percentages can add up to large sums of money over the years.

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