What have we learned since the pension freedoms became a reality? And what does the future hold? Neil MacGillivray, James Hay’s Head of Technical Support considers these points further.
Neil MacGillivray, James Hay’s Head of Technical Support, considers what we’ve learned over the last six months since the pension freedoms came into force.
The gold rush begins
Over the first six months of the 2015/16 tax year, HM Treasury confirmed that £2.7bn was withdrawn from pension schemes; the equivalent of 21,600 Lamborghinis! The Association of British Insurers however, estimates the figure to be much higher at £4.7 billion. For the most part, according to a Telegraph article in June, savers appear to be taking a common sense approach with 50% of pension pots being encashed for fund sizes of less than £10,000 and pots worth over £100,000 equating to less than 1% of full withdrawals.
The majority of pensioners are also choosing what could be considered as ‘sensible’ options when it comes to spending their hard earned – 45% opting for paying down existing debts as opposed to 29% splashing out on ‘lifestyle’ spending, which may well include those flash cars.
In James Hay’s experience, we’ve also seen a similar trend, though not on the same scale, with the largest proportion of full encashments coming from our smaller pots:
| Fund size | No. of SIPPs available | No. fully encashed | Percentage |
| < £30,000 | 1,567 | 23 | 1.46% |
| £30,001 to £50,000 | 714 | 6 | 0.84% |
| £50,001 to £100,000 | 2,009 | 5 | 0.25% |
| £100,000 to £250,000 | 4,451 | 8 | 0.18% |
| > £250,000 | 7,459 | 17 | 0.22% |
To 30 June
Nomination nightmare
The pension freedoms have heaped further importance on the often thorny issue of nominating beneficiaries. The changes to the rules and the introduction of nominee and successor beneficiaries mean that non-dependants can choose to take a pension income rather than being restricted to taking a lump sum. In other words, dependants, nominees and successors now all fall under the heading of ‘beneficiary’ with effectively any of these being able to take a pension following the death of the member.
With extended families made up of spouses, ex-spouses, children from previous marriages, grandchildren and great-grandchildren, the need for effective nominations has never been more pertinent. And with changing circumstances comes a need to review nominations regularly. Those in the process of nominating beneficiaries should look to keep it simple where possible and ensure that they use the providers own nomination form. If the member drafts their own form, they’ll need to ensure legal advice is sought.
Further risks
Another issue that has become more prevalent since the pension freedoms is that of the insistent client; keen to take advantage of unlimited withdrawals by transferring their final salary scheme to a defined contribution scheme when they would be better served by staying put. Hymans Robertson has seen a 50% increase in requests for transfer values from defined benefit schemes. Industry wide, the figure is expected to be around the 210,000 mark. If an adviser cannot recommend the transfer then the member may struggle to find a pension provider who will be prepared to accept his request.
This is leading to individuals being tempted to take guidance from firms who actively promote a free guidance service, a section of whom are unfortunately fraudsters. The City of London Police announced startling figures, reporting a loss of £1.4m in April and then £4.7m just a month later - a rise of 235% in pension liberation scams.
What the future holds
A recent Office of Budget Responsibility fiscal sustainability report concludes that the current state pension and triple lock are simply unsustainable. The estimated cost of the state pension for 2019/20 is 5.1% of GDP, rising to 7.3% by 2064/65. The state pension age, which was due to reach 68 between 2044 and 2046, is now being earmarked for the mid 2030s. By 2064, we could be looking at 75. This underlined the need to start saving more.
The Pension Policy Institute reports that individuals need to save between 11 -14% of salary to have a 75% chance of achieving their targeted retirement income. This is one driver for HM Treasury’s target of 8-9 million more of us saving for retirement through auto-enrolment by 2020. So is the future all doom & gloom?
The Green Paper of July 2015 – “Strengthening the incentive to save”, aims to address this by encouraging more people to take responsibility for their pensions. It states that the support from government must be simple and transparent and that it’s vital that the system is sustainable for the longer term.
The cost of the current system in terms of income tax reliefs and lost national insurance contributions was £50bn in 2013/14 and over two thirds of tax relief currently goes to higher and additional rate taxpayers. Could there be a better way to encourage more people to save or is the only way to make it compulsory? Only time will tell but further major change is undoubtedly on its way.
Conclusions
In the six months since the regulatory changes, we’ve seen that those with larger pension funds appear to be being cautious and understanding the benefits of retaining their savings within the pension environment. This is good news for the pension industry but may be short lived depending on what future changes come into play. The one thing that is certain is that with the introduction of tapered annual allowance from next year and the possibility of changes to tax relief in the not too distant future, members should be encouraged to contribute as much as they can now before the end of this tax year. And to reiterate, the importance of reviewing nominations regularly should not be underestimated, so that savers ensure their funds filter down in accordance with their wishes.
Any opinions given are those of the individual writing this blog and not necessarily those of James Hay Partnership
Any opinions given are those of the individual writing this blog and not necessarily those of James Hay Partnership
Our Technical Hub provides support on complex tax, trust and pensions issues whenever you need it. For a range of useful resources and to find out more visit: www.jameshay.co.uk/technicalhub.