People think of pensions as the state pension and the things that people who work for the Government or are in their fifties and older, got from companies.
They do not think of workplace pensions as providing them with retirement income so much as pots which they can raid tax-free up to 25% of the value of the pot.
Every now and then a rumour is put out that the tax-free bit is going to be taken away and a rush to get hold of the tax-free cash goes up. You cannot blame people for raiding their pots when the noise from the press is so loud.
What’s left in the pot is taxable money and people are confused about how it converts into pension. They know they can buy an annuity and most people think it is bad value for money as the Chancellor.
This is the Chancellor (George Osborne) from his Ministerial statement in 2014 , a statement that followed the “Pension Freedom” budget
This Government believes that individuals should be trusted to make their own decisions with their pension savings.
One of the most important stages in life everybody has to save for is retirement, and one of the biggest financial decisions people will take is what to do with those savings when retiring.
Under the old system, only those with very large or very small pension pots could access them with any flexibility.
That is why at the Budget I announced the most radical change to how people can access their pension in almost a century. From April 2015, everyone over the age of 55 with defined contribution pension savings will be able to access them as they wish, regardless of their total pension wealth, subject to their marginal tax rate.
Those who want the security of an annuity will still be able to purchase one. Equally, those who want to access all of their pension savings will be able to take them as a lump sum.
Those who do not want to purchase an annuity or withdraw their money in one go, will be able to keep their pension invested and access it over time, for instance through a drawdown product
Of course there will become more options. Already you can transfer your pot into the LGPS or some unfunded DB plans run by the company, you can get a pension from these in exchange and there are a few DB plans that allow active members to transfer in pots to boost their pension.
But none of this is widely known and as it stands most people only understand one thing, that they can have the money in the pot when they want it after 55. Small pots typically get taken in a single amount , the larger the pot more likely they will only see a quarter taken, with the the pot crystallised (which means the next dip in the pot will get a tax deduction before it gets to the withdrawer). So money sits around awaiting further withdrawals or is raided again because people are free to.
Reading the article in Professional Pensions won’t give you much sense of ” DC pensions”
three million people grabbing £102 bn at £34k a time
Just said the government’s figures showed the “huge scale” of withdrawal of pension funds before state pension age which raised concerns about the sustainability of pensions. It also noted the Financial Conduct Authority (FCA) had previously described this as “the new norm”. Just’s revelation is that all this money is coming out early, before State Pension age (66 going up to 67 soon).
Just’s figures from the DWP relate to withdrawals on which tax was liable , not withdrawals of tax-free cash (or transfers to annuities or other ways of drawing down pots). My suspicion is that most early with drawls (mine included) happened to protect the tax privileges of tax-free cash
Let’s not be surprised, we were promised freedom and unless we want to stop people spending their money, they will take their money when it makes sense. I hear very little conversation among my friends about why it’s better keeping money in the pot when the money’s tax-free now but might not be tomorrow.
I hate to say it, but this tells me that for many people, DC pensions are currently treated as savings pots. They aren’t pensions at all, telling people that they need to go back into annuities by default assumes that people didn’t cotton on to Pension Freedoms. I think they did and will be asking for more from their pot than a purchase of annuity from Just or another insurer.
People may not expect another windfall, but they don’t want another unpopular financial straight jacket called “annuity”!
