Pension Freedoms Two Years On: Are They Working for Everyone?
Apr 26, 2017
In April 2015, the government introduced new pension freedoms that were set to transform the way millions of people choose to spend their retirement funds. Designed to give savers greater access to their pension pots, the Freedom and Choice Reform, delivered by former chancellor George Osborne, was met with both apprehension and optimism as the plans promised to put more retirees back in the proverbial driver’s seat.
Some of the changes to the pension freedoms included no longer having to purchase an annuity alongside a defined contribution pension, the ability to take an entire pension as a lump sum, and drawdown of pension income being taxed at marginal income tax rates.
Has It All Been Plain Sailing?
Despite an impressive 14% of working-age people now saving more as a result of the pension freedoms, Aegon found that savers remain frustrated and confused by government restrictions.
In addition to this, many savers argue that 2015’s pension freedoms favour individuals in their 50s and 60s rather than working for everyone. Could scrapping exit fees be the answer? From April 2017, pension firms will no longer be allowed to charge a penalty of more than 1% of the overall fund value for exiting a pension policy earlier than planned.
Before the introduction of this cap, savers could wave goodbye to as much as 40% of their total fund if they attempted to switch to another company or cash it in before an agreed date. But although this figure has now decreased dramatically, there is still some way to go before everyone can reap the benefits as the 1% cap currently only protects those aged 55 and over.
Some pension companies have voluntarily extended their cap on exit fees to cater for younger savers. Yet some of the UK’s biggest firms have resisted, arguing that the cap’s primary objective is to help savers utilise the new pension freedoms.
But isn’t leaving those under the age of 55 vulnerable to potentially boundless exit penalties simply unfair? If getting rid of penalties altogether is not on the cards then should providers not apply the 1% cap to customers of all ages at the very least?
Is There a Silver Lining?
Fortunately, it’s not all doom and gloom. According to Aegon, since the pension freedoms were announced two years ago, 5.5 million people have increased their pension contributions, with the average pension pot size rising from £29,000 in April 2015 to £50,000.
Aegon’s study also revealed that a larger proportion of savers are now seeking professional financial advice on their plans for retirement. Out of a survey of 2,000 people, Aegon found that 15% had realised they need to start planning for retirement. This is up from 10% in April 2016.
So, with retirement planning on the increase, it is hoped that all pension companies will look to extending the cap on exit fees so that people below the age of 55 can enjoy the same pension freedoms as everyone else.
1. FT Adviser – https://www.ftadviser.com/pension-freedom/2017/04/05/millions-save-more-as-a-result-of-pension-freedoms
2. The Telegraph Money – http://www.telegraph.co.uk/pensions-retirement/financial-planning/pension-freedoms-two-years-five-ways-make-better
3. Pensions Advisory Service – https://www.pensionsadvisoryservice.org.uk/about-pensions/pension-reform/freedom-and-choice
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