A decade on from the introduction of pension freedoms, new research reveals that many eligible savers opted to withdraw from their pension under these rules without seeking any advice at all.
The Pensions Schemes Act 2015 implemented radical proposals tabled by the coalition government that would give savers greater access to their pension pots.
From 6 April 2015, savers aged 55 were allowed to withdraw up to 25% of the value of their pension pot as a tax-free lump sum, and the rest of the pot as taxable income. This age threshold will rise to 57 in 2028.
Savers are increasingly withdrawing from their pensions. The total number of pension plans accessed for the first time in 2023-24 increased by 19.7% to 885,455 compared to 2022-23, according to the Financial Conduct Authority (FCA).
The overall value of money being withdrawn from pension pots increased to £52.2bn in 2023-24, a rise of 20.6% from the prior period.
However, almost one in five savers (18%) eligible to make a withdrawal surveyed by Royal London used pension freedoms without taking any form of advice. Only 40% looked at the tax implications of withdrawing a taxable lump sum.
“It is concerning that so few people took financial advice or made use of free guidance services, such as Pension Wise,” said Royal London pension and tax expert Clare Moffat. “Worryingly, our research shows that many made decisions that may not have been in their best interests over the longer-term.
“It demonstrates why there’s a need for more people to access the right level of support, including from their pension provider – something that the FCA, is exploring this year.”
Freedoms used with restraint
Pension freedoms have, however, been put to good use. Almost a third (32%) of those who withdrew a tax-free cash lump sum used this money to pay off a home loan or other debt, according to Royal London.
Its research showed that 15% of those surveyed paid off their mortgage debt, while 18% paid off other types of borrowing.
A separate survey by Standard Life found that 84% of respondents believed that they had benefited from taking money out of their pension.
When pension freedoms were introduced, the then-pensions minister Sir Steve Webb said that it was up to savers how to use this money.
“If people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice,” he said in 2014.
“Pension freedoms were designed to give consumers more flexibility and choice about their retirement, and they’ve certainly done that,” said Moffat. “Despite comments at the time that people could buy a Lamborghini with their retirement pot if they so wished, we’ve found little evidence of people doing so.”
