For all the resilience the UK economy has shown, there is no doubt that this year's ISA season is set against a backdrop of uncertainty. Whatever the pros and cons, Brexit, and a lack of clarity on what our future economic relationship with the EU will look like, has left us at a crossroads.
The pension freedoms in review
George Osborne’s pensions freedom policy of April 2015 was greeted with widespread acclaim. There were invariably detractors and sceptics, but against a backdrop of plummeting annuity rates, the ability to exert greater control over one’s nest egg, and to ostensibly withdraw from it with greater tax efficiency, was always likely to be a popular vote winner.
So, more than two years later, what has the impact been? And how have pensioners responded? The Financial Conduct Authority (FCA) published a report of their findings from a study of the retirement income market this week, which made for very interesting reading.
A new normal
The overriding takeaway of the FCA’s research was that accessing pension pots early has become “the new norm”. Previously, those over the age of 55 had effectively been forced to annuitise their private pensions. However, under the new rules, those within this age bracket can withdraw any amount they wish, with 25 per cent being tax-free, and the remainder taxable at the individual’s marginal rate of income tax. As such, it could be taken as a lump sum, or provide a mechanism for income drawdown.
Notably, 72 per cent of pots accessed since the pension freedoms came into being were held by people under the age of 65, with the majority opting for lump-sum withdrawals, rather than income drawdown. Additionally, some 53 per cent of pots accessed were fully withdrawn, while 30 per cent of drawdown plans are now bought without taking financial advice, compared with just 5 per cent prior to April 2015.
Furthermore, over half (52 per cent) of fully-withdrawn pots weren’t spent, but rather channelled towards other savings and investments. Many respondents cited their reason for doing so as a “mistrust of pensions”.
It also emerged a few months ago that the pension reforms have boosted the coffers of HM Treasury five times more than had been forecast in this respect, implying that the levels of withdrawal are rapidly outpacing expectations.
A cause for concern?
The FCA has suggested there may be cause for intervention on its part to ensure the market functions correctly, and that pensioners are protected against poverty in old age as a result of misinformation and/or bad decisions. We support any measures that protect consumers, but there were a few other statistics which also caught our eye.
Firstly, of the fully-withdrawn pots highlighted in the study, around 90 per cent were valued at under £30,000, suggesting the tax expense incurred would largely be limited. Also, over 94 per cent of those taking full withdrawals had other sources of retirement income (in addition to the state pension).
It was also interesting to note that twice as many pots are being shifted to drawdown than being converted into annuities.
Making sense of the numbers
So, do the numbers suggest that pensioners are simply taking advantage of the fluidity offered by the new freedoms, and making sensible decisions with their pension funds? Or are we heading towards an income shortfall crisis for the elderly in decades to come?
The very nature of data is such that it is open to interpretation. The TUC’s general secretary, Frances O’Grady, described the findings as a “damning indictment” on pensions freedom, while Old Mutual Wealth noted that putting retirement money into other investments can have “disastrous long-term consequences”.
Indeed, the latter is undoubtedly true, and any mechanisms which provide extra protection for those going into non-advised drawdown (and/or making lump-sum withdrawals) should be looked at. Sites like Pension Wise do a good job of providing free guidance, but the wider something like this can be thrust into the public eye, the better.
We also advocate informing pensioners about the risks and rewards of moving their retirement cash into other savings and investments. For example, peer-to-peer lending (P2P) can provide lucrative returns, and, by taking returns as an income directly to the bank – which you can do with Lending Works – it may be particularly suitable for those in retirement. That said, there are risks involved with P2P, and it is thus important that our over 55s are making educated decisions.
But to suggest at this early stage that the pension freedoms require a mass overhaul, or that they should be reversed, is pure folly. Let us not forget just how poor the rates on annuities are, with 2016 declared “the worst for payouts ever”, and a fall of 15 per cent according to some analyses. Giving pensioners alternatives should not be construed as something unequivocally negative.
And if the core issue is that consumers harbour mistrust towards pensions, then a new revolution would surely entrench this. The time for stability and predictability is now. Of course, that is not to say that things are perfect as they are. But, with some considered initiatives and steady hands, the good of these pension freedoms can be maximised, and the risks mitigated.
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The peer-to-peer (P2P) lending industry is now regulated by the Financial Conduct Authority (FCA). The regulatory framework has been designed to protect customers and promote effective competition.
Loan underwriting is the process that we undertake to analyse all of the information provided by each loan applicant and their credit file to assess whether or not that applicant meets our minimum loan criteria. As part of that process all data is verified, analysed and summarised to paint a picture of each applicant.
When you earn interest from a regular bank savings account, for example, the bank automatically deducts basic rate tax (currently 20%) before paying your interest. With interest earned from peer-to-peer lending, tax is not deducted automatically so lenders will need to declare their income to HMRC.
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