On the 19th March 2014, George Osborne, the then-Chancellor of the Exchequer, announced in his budget speech- “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear. No one will have to buy an annuity”.
Before 2015, most people with UK Defined Contribution pensions purchased an annuity which is a form of guaranteed income. Yet, in the days that followed, advisers, providers, and savers alike were left having to rethink and replan retirement strategies that were already in place.
So, a decade on, are pensioners better off as a result of these changes?
In 2012, there were over 10 million consumers that held UK defined contribution pensions. Although income drawdown was possible¹ and increasing in popularity due to declining annuity rates, annuities was still the most common product in the market. In 2012, 420,000 annuities were sold, 16 times more than income drawdown products².
Fast forward to 2021/22 you can see from data produced by the FCA that income drawdown was clearly the preferred option for retirees³.
Then came 2023, in which a new post-pension freedoms record was set for annuity sales.
This data is hardly surprising given the poor value annuities offered between 2015 and 2021 followed by the sharp increase in annuity rates in 2022⁴.
Declining UK Annuity Rates
As annuity rates declined in value from 2008 to 2022, we saw Defined Benefit (DB) transfer values rising during this period, reaching all-time highs in December 2021.
Since pension freedoms were introduced in the UK, the flexibility, enhanced death benefits and favourable transfer values presented an attractive alternative to members of DB pensions, and we saw a significant number of transfers take place.
“the British Steel debacle in 2018 shone a light on some of the unscrupulous practices that were taking place”
However, the British Steel debacle in 2018 shone a light on some of the unscrupulous practices that were taking place within the industry which led to intense scrutiny on advisers by the FCA. You can see from the figures below that since 2018, there has been a decline in the number of transfer outs that have taken place. The reason for this decline is based on a number of factors, including the rising costs of advice, increased ‘red tape’ to facilitate the transfer and over the last couple of years, falling transfer values⁵.
The Fall of Defined Benefit Pensions
With people living longer and more people entering retirement, over the last 20 years we’ve been witnessing companies close their DB pension schemes to new members as they simply cannot afford to keep paying out. Whilst the number of DB pension schemes has been declining, you can see the number of defined contribution schemes has been rising, helped by auto-enrolment which was introduced in 2012. Reported assets values in Jan 2023 were at £143 billion which represents an increase of 546% since the beginning of 2012⁶.
While defined contribution schemes are more flexible than defined benefit schemes, they also require more time and expense to ensure that they are well managed at, and through retirement.
Moneyhelper, provided by the government’s Money and Pension Service, is a free service which is there to provide information and guidance to people that are having to make financial decisions. However, whilst a useful tool, they cannot provide tailored financial, tax or legal advice. In fact, FCA data shows that only 1/3 of those accessing DC pots in the last four years actually used this service.
With the Baby Boomers in retirement and Generation X approaching retirement, more and more retirees will be beginning to drawdown from Defined Contribution pots, so it’s vital that they have access to advice so they can make informed financial decisions regarding their pensions and their futures.
“Only 8% of UK Consumers received full financial advice in 2022.”
The FCA found that only 8% of UK consumers received full financial advice in 2022. They are currently consulting on making changes around the definitions of financial advice to make it easier for more people to access the information they need⁸.
One of the repercussions of flexible access drawdown have been the taxation issues which many pensioners, especially expats, have faced. HMRC stated in their January newsletter to pension schemes this year that from Oct 2023 - Dec 2023 they processed over 12K tax repayment forms with circa £38M in tax being repaid⁹.
In summary, whilst pension freedoms has brought with it certain challenges, overall, I believe that clients having control and the freedom to utilise their life savings as they see fit in retirement, has and continues to be a positive thing. However, it’s imperative that investors are fully educated and informed of their options so that they can go onto enjoy their retirement without having to worry about their pension.
Carla has spent the last 15 years helping expatriates to manage their finances effectively, and has been learning, to some extent first hand, of some of the challenges faced when living abroad. In particular, she has extensive knowledge of the interplay between the UK, French and Swiss systems, having lived and worked in each of these countries. Carla has built her reputation as a trustworthy adviser to individuals looking to plan for their futures, and her high level of client retention is a testament to this.
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