Freedom and choice in pensions: that was the name of the government’s consultation which launched immediately after the chancellor’s 2014 Budget which saw changes that could prove the biggest shake up in retirement income provision since the introduction of the Old Age Pension was introduced in 1908.
For most providers across the industry, as well as updating systems and processes ahead of the pension reforms, the key business priorities were to ensure that those reaching retirement ahead of the April 2015 freedoms were not disadvantaged and were also able to access relevant products.
The immediate to short-term response led to a number of initiatives aimed at good customer outcomes – such as increased cancellation rights and rate guarantees for those customers that had just purchased annuities and the launch of one-year annuities that served as a transitional proposition for those who wanted to take an income ahead of the pension changes coming in, but did not want to be stuck in a lifetime product. We also saw the advent of low-cost drawdown solutions and flexible guaranteed funds.
Immediately after the Budget the sale of lifetime annuities fell, with many pension savers deciding to defer purchasing a long-term retirement income product until the pension freedoms came into place.
The interim rules that were implemented made income drawdown more attractive and, more importantly, more accessible to those approaching retirement who wanted a solution that offered them so much more flexibility.
We are now more than two months into this brave new world where pensioners have so many more options and, more fundamentally, a very real decision, one that most had not even had to contemplate.
Although it is too early to outline the far reaching impact of these changes, industry figures show that since last year’s Budget there has been an increase in demand for drawdown and a fall in lifetime annuity sales.
In the days immediately after April 6 providers took thousands of calls from customers. The calls could be broadly split into two camps: those who had read about the pension changes in the weekend papers and were looking to find out what the new landscape meant for them and wanted more information on the options now available to them. The other group were customers who wanted to cash in.
Among those who wanted to cash in, a significant proportion changed their minds once they realised that there were potential tax implications of doing just that. In fact, almost half of those who wanted full encashment had not realised that taking their money as a lump sum could impact their tax position. The majority of customers who chose full encashment even after they had been made aware that they may have to pay a higher rate of tax wanted to access their pension fund in order to repay outstanding credit card debts and mortgages.
One of the recurring themes among those approaching retirement is the fact that people want greater income flexibility; many also want a guaranteed element to their income. This is completely understandable as for many people their pension fund is one of their largest assets, after their home, and once they have exited the workplace they cannot easily rebuild this fund should they make a decision that significantly erodes their capital.
