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Point of View

Pension freedom, or pension paralysis?

Until the so-called ‘pensions freedoms’ came into force in April 2015, most savers were forced to buy an annuity with their pension savings, giving them a guaranteed income for life. Now savers can take their pension fund as cash, and spend it however they choose. But is giving people too much choice a good thing?
 
A recent survey by Nottingham University Business School and Willis Towers Watson suggests not. The study of 2,000 UK workers has found that, despite high confidence in the initial stages of the financial decision-making process, 47% of consumers have trouble committing to the final decision*. And over a third of savers (34%) felt they had too much choice when it came to saving for retirement. None of this bodes well for the thousands of people approaching retirement, who now face the prospect of making some serious financial decisions that will affect them for the rest of their lives.
 
When it comes to making those decisions, it’s not just about taking a pot of money and deciding where and how to invest it (which in itself is a daunting prospect for most). Nowadays, people entering retirement have to think very seriously about their health, and how long they think they might live, as well as be realistic about the lifestyle they want to lead now, and in the future. Making decisions today that will stand them in good stead for anything up to 30 years or more is not easy.
 
So it’s no wonder we’re finding people in a state of financial paralysis when they reach retirement. While annuities may not have been the right solution for everyone, and collective inertia meant that most people failed to shop around for the best deal, at least they offered some lifetime guarantees, protecting clients from running out of money.
 
Earlier this year, the Association of British Insurers published data showing the effect of the pension freedom reforms. In one year, £4.3 billion was paid out in cash lump-sum payments, with an average payment of £14,500*. The industry reaction was positive, citing the new legislation as a big win for the consumer. But is it? As with all statistics, it’s not just about what the data tells us, but what the data doesn’t tell us. How much money remained in pension funds, and why? How many people, in receipt of their ‘pension wake-up pack’ from their provider, panicked and decided to do nothing at all? What has happened to the £4.3 billion paid out in cash lump sums, and how much of it would have been better invested, especially in this low-return environment?
 
The reality is that we may not know the answers to these questions until it’s too late, and sadly it’s usually the people who can least afford it that suffer the most. One thing is for sure − no matter what your circumstances, if ever there was a time to seek help with financial planning, retirement is it. Having a plan, and allowing room for flexibility in that plan  surely has to be better than doing nothing at all. If you would like to speak to a financial adviser about your retirement options, get in touch, we’d love to help.

 

*https://www.nottingham.ac.uk/business/news/retirement-plans-under-threat-as-workers-struggle-with-pension-paralysis.aspx

*https://www.abi.org.uk/News/News-releases/2016/08/ABI-publishes-full-year-of-pension-freedom-data

Please remember any views or facts expressed above are based on information received from a variety of sources which we believe to be reliable, but are not guaranteed as to accuracy or completeness. Any expressions of opinion are subject to change without notice. None of the information should be regarded as advice. Past performance is not a reliable indicator of future results. Investing involves risk and the value of investments and the income from them may fall as well as rise and is not guaranteed. Investors may not get back the original amount invested. Any tax treatment is dependent upon individual client circumstances and may be subject to change.

Sanlam is a trading name of Sanlam Wealth Planning UK Limited (Reg. in England 3879955) and English Mutual Limited (Reg. in England 6685913). English Mutual Limited is an appointed representative of Sanlam Wealth Planning UK Limited which is authorised and regulated by the Financial Conduct Authority.

Registered Office: St. Bartholomew’s House, Lewins Mead, Bristol, BS1 2NH.

Investing involves risk and the value of investments and the income from them may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.