It’s coming up for three years since the Government heralded a major milestone in how we can use our savings and investments to fund our later life: the freedom to invest our pension savings into something other than an annuity.
With annuity rates at such low levels in recent years, the attraction is obvious – and everyone in the financial sector and most in the later life arena would agree that, in principle, pension freedom is a “good thing”.
Since then, some £9.2 billion has been released by a total of around half a million people – which, when you look at the total amount of money invested in pensions is not mega bucks… but still a tidy sum.
The average amount being released (around £6,000) is, though, quite small, which does beg the question about the financial status of many of those taking money out of the system. Anyone taking a large amount out and reinvesting it in something else would (almost certainly) be taking expert independent advice.
For a small amount, taking advice can look relatively expensive, unless it’s the “free” sort – and that can often comprise simply of signposting. Which may explain why there have been a raft of stories around people (whose details have ended up in the wrong hands) being scammed.
The other concern is that many people on reaching 55 are accessing their pension pots in order to release the tax free element and use that to pay down debts or fund other parts of their life – such as their children’s studies or parents’ care.
Again, while losing expensive debt has to be a sensible move, and some financial choices are forced on us, there is the concern that many people may reach retirement and not have enough to get by. And retirement can last a very, very long time these days!
Curiously, annuities have been making something of a comeback in popularity recently – assisted by rates moving off the bottom. Equally, the stock market has been enjoying a strong run lately, so anyone moving into (for instance) a drawdown pension may well have found their savings faring better than they’d hoped.
Annuities have remained popular for many years because they are there for the rest of your life, even if they offer humdrum returns. Drawdowns offer more flexibility and arguably a better return, but there are no guarantees. You can read our blog on that here: https://www.retireeasy.co.uk/news/pot-luck-pension-schemes-winning-good-old-belt-braces-mark-soper There are, of course other products where your money can be invested.
Look around and you’ll find that there are ready takers out there for anyone wanting to release their pension pot – and at far better rates than this time last year. That makes it a tempting prospect – especially in an uncertain world.
Our thoughts on this thorny subject? In general, pension freedom offers a significant potential to get a better deal. But everyone’s situation is different, and so too their attitude towards risk and reward. If you have the opportunity to free up your pension pot, do look at all your options and also the long-term consequences.
But, above all, make sure that the decision you make is based on thorough research of ALL your choices, not just the ones that someone is offering you, and is backed by independent expert advice. The cost might look expensive, but getting it wrong could prove even more so.
And if you really want to see the impact of your various options on your long term finances, feed in all the scenarios into your RetireEasy LifePlan – with the Classic LifePlan priced at just £2.99 per month and the Premium Plan at just £3.99, you’ll be able to see at a glance what each of them could mean to your situation in 10, 20, 30 or even 40 years’ time.
