The freedoms have been hugely popular with far fewer people buying annuities and almost 700,000 people opting instead for drawdown, with funds in drawdown exceeding £100bn. But with over 200,000 of these not seeking advice from a professional, the FCA has been consulting on additional protections for this growing group.
Taking too much too soon can mean paying more income tax, as the pension withdrawal is treated as income in that year and can take people into a higher tax band. The Inland Revenue recently talked of a ‘tax bonus’ from the pension freedoms of £5.1bn which is the amount of extra income tax those accessing the freedoms, taking higher income or starting earlier, are predicted to have paid by April 2019.
Steven Cameron, Pensions Director at Aegon said: “The FCA has already highlighted that it believes those using the pension freedoms to draw down income without seeking advice face a raft of retirement risks. Its latest findings show that pension firms are meeting the regulator’s requirements, providing comprehensive and timely information which is clear and fair. But despite this, not all customers are fully engaging with the information, increasing the risk of running out of money in retirement or choosing investments that are either too risky for them or don’t generate enough return. This reinforces the benefits of seeking advice.
"Those who were first to use the pension freedoms back in April 2015 look to have done well. Looking at typical investment returns over the last three years, people taking the average income of 5.2%1 may find they have more in their pot than when they started, even after taking substantial income. However, retirement can last 20 or even 30 years and as investment returns can change dramatically year on year, this level of income may not be sustainable for life.
“Before the pension freedoms, the Government set limits and required pension providers to review policies every three years, and to reduce income if it looked like funds were being run down too quickly. In the new world, unless an individual has an adviser, there’s no-one checking progress. Managing retirement finances is hugely important, be it where to invest, avoiding paying unnecessary tax or reviewing how much income to take to avoid running out of money.
Figures just released from financial regulators show that on average, people using drawdown are taking an annual income of 5.2%. Aegon has produced figures to illustrate how the first people to use the pension freedoms in April 2015 may have done based on average funds, average income being taken and typical investment returns achieved.2
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