This April marks 10 years since the introduction of “pension freedoms” by the then Coalition government and launching a retirement revolution that has transformed the UK market. So what have been the big changes in how we fund our retirement… and what might be in store?

Chancellor George Osborne’s 2014 Budget certainly grabbed the headlines – not least because the introduction of “pension freedoms” came as a surprise to the sector, with some complaints that there had not been enough consultation on the decisions.

Giving individuals significantly more choice and control on how and where they invested their pension pots was also not without its controversy, as there were concerns that savers could choose to splurge them on a Lamborghini if they so chose – albeit the financial penalties for doing so were considerable.

The impact on annuities was immediate. According to Rachel Vahey, AJ Bell’s Head of Public Policy, “Annuity sales nose-dived following the reforms. Some 75% of defined contribution pensions were used to buy an annuity before 2015, falling to just 17% of pots worth over £30,000 last year and just 10% of all pots accessed since 2015.”

That trend has been interrupted somewhat, with returns now at their highest level since the financial crisis. Sales of annuities in the last 12 months have rallied, says Vahey, “but they are unlikely to match the number of people choosing drawdown.”

So what has taken their place? Drawdown has been the biggest winner. This allows you to take as much or as little income from your pension as you like. Last year, 60% of all those pension pots in excess of £30,000 used drawdown, while a further 8% used uncrystallised funds lump sum payments – another form of flexible income payment.

“Among those with £100,000 or more in their pension pot,” continues Vahey, “the vast majority opted for flexible income through either drawdown (73%) or UFPLS (9%), while just 15% purchased an annuity.”

For those with smaller pension pots worth less than £30,000, withdrawing a pension in full is a common choice. In fact, around 55% of pension pots have been fully encashed since 2015, and the vast majority (90%) were worth less than £30,000. AJ Bell include a “health warning” on their website on taking this course of action, especially for those that that do not have other sources of income to fall back on. “When you withdraw your entire pension pot, it can no longer provide you with an income in retirement.”

They also go on to say that, “Withdrawing your whole pot may push you into a higher tax band, meaning you receive far less than you expect.”

“Running out of money”

Royal London research, meanwhile, has found that nearly 1 in 12 (8%) took their tax-free cash lump sum within six months of their 55th birthday, the earliest age at which most people can access money from their pension, and more than half (55%) of those eligible to take the maximum tax-free lump sum of 25% electing to do so.

Paying down expensive debt is one major reason to tap into people’s pension pots:  almost a third (32%) of those who took out a tax-free cash lump sum used it to reduce their borrowing, and another one in four (26%) depositing the money in a bank or savings account.

Almost 1 in 5 (19%) spent the money on home improvements, while 1 in 12 (8%) gave it to family members.

Worryingly, more than two in five (42%) of those aged 50 or over say they are “worried about running out of money in retirement”.

Withdrawal rates

So how much are people taking out of their pot?

The most popular option in 2023-24 was to take income at a withdrawal rate of 8% or over, which largely reflects the number of small pots drawn down relatively quickly, with the average withdrawal rate falling to more moderate levels from larger pension pots.

Among those with £100,000 or more in their pension pot, 65% withdrew less than 6% income last year, with 44% taking under 4%.

Managing small pension pots

One change enabled by pension freedoms has been for those with a number of modest pension pots to fully encash one account rather than set up multiple small annuity income payments in retirement.

Rachel Vahey adds: “Some people may find combining pensions more beneficial. Combining several smaller pots to form a larger one could give them more options and reduce charges, potentially producing a bigger income in retirement.”

So what lies ahead?

For some time now the market has been waiting for “The Pensions Dashboard”. Once it is in place, it will show people all of their pension pts in one place and (theoretically at least) to engage savers and enable them to take fuller control of their future once launched.

But that day has not yet arrived.

The other big shift currently underway is that the number of people on defined contribution pensions for their later life income is soaring, while so called “gold plated” defined benefit pensions fade into the distance.

Rachel Vahey concludes: “As we enter the next decade of pension freedoms, making sure these people are supported in their retirement decisions is paramount. People face tough decisions on how to secure a retirement income, and how much to take and when.

“The introduction of targeted support,” she insists, “will be a gamechanger, shaping the narrative for the next 10 years. Deciding on a robust income strategy is challenging, and more personalised guidance can help people understand their options, nudge them to act, and encourage more to seek regulated advice.”