Article by Vintage Value Investing
For many, the legacy of former Chancellor George Osborne will forever be tainted by the impact of sustained and arduous austerity measures.
Even some of Osborne’s more progressive measures have achieved mixed results to date, with his so-called “Pensions’ Freedom” reforms providing a relevant case in point. This legislation, which scrapped the forced purchase of annuities and income structures in order to enable pensioners to access their pension funds as and when they liked.
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So far, so good, but since Osborne’s departure concerns have emerged that the over 55’s pension pots may eventually be drained before each beneficiary has died. This is being borne out by statistics, but what steps can you take to avoid this issue?
Pensions' Freedom in Numbers
According to HMRC figures released last year, an estimated 770,000 over 55’s had taken money from their pension pots under the new reforms between April 2015 and June 2016. These individuals had also withdrawn an average of £11,000 in the second quarter of 2016 alone, while a cumulative total of £6.1 billion had been taken out of UK pension funds since the legislation had been officially passed. This marks a significant sum of money, and one that has forced pension providers and financial planners such as Tilney to warn that the reforms could well leave some elderly applicants in poverty in their old age.
This is not to say that pensioners are not thinking through their decisions, of course, as the government confirmed that there had been more than 2.7 million visits to the advisory ‘Pension Wise’ service in the first year after the reforms. It is also hard to argue with the assertion that pensioners required greater flexibility when accessing their hard-earned pension funds, and in this respect Osborne’s freedom reforms have had a positive impact in society.
Instead, the concern lies with the sheer volume of pensioners who have looked to capitalise on the new legislation, with experts suggesting that it is unwise to measure success solely against its popularity or the amount of money that people are withdrawing. In fact, given that an average of £11,000 was taken out by individuals as a result of the reforms in the second quarter of 2016, it is fair to surmise that pensioners were accessing their pensions too flexibility and at a disproportionate rate to their total pension funds.
The Bottom Line
Such excesses were almost inevitable, particularly after the rates of income paid on annuities fell to record lows prior to the new reforms. This left pensioners feeling the pinch, and the liberating impact of Osborne’s progressive legislation created a rush to market that has seen disproportionate amounts of income withdrawn.
Now is the time for balance, however, and pensioners must arguably take it upon themselves to manage their pension funds responsibly and invest in long-term financial planning. Only this will help to optimise their pension funds, while ensuring that they capitalise on new legislation in the most productive way.
