Assessing the impact of the pension freedoms

The HM Treasury said on 28 July 2016: “New HMRC figures show more and more people are taking advantage of the new [pension] freedoms, with 159,000 people having accessed £1.7 billion flexibly from their pension pots since April this year.”

The press release itself was entitled ‘Britain’s pension revolution goes from strength to strength’, and the supporting figures do indeed suggest that the new access to pension funds post age 55 are popular with savers. Below is a summary of the access figures since the rules changed in 2015:

Period         No. of individuals        Total value of payments
2015 Q2       84,000                         £1,560m
2015 Q3       81,000                         £1,170m
2015 Q4       67,000                         £800m
2016 Q1       74,000                         £820m
2016 Q2       159,000                       £1,770m

Unfortunately that is largely as much as this release tells us, with HM Treasury making no attempt to explore why there is such a surge in usage in quarter 2 this year, or, indeed, how the savings accessed are being utilised. And this last point is the crux of the matter.

It is worth highlighting that the principal aim of pension savings is to provide for a long term retirement income for the post-work years. If the funds are instead being accessed earlier – and possibly for everyday consumer spending – then there is a very real danger of many older workers having nothing other than state pension to fund their later years.

So are there any other indicators as to how these funds are being used once accessed?

There are indeed earlier releases by another government department, the Financial Conduct Authority (FCA), on this very topic. The FCA found that the number of full encashments (i.e. taking the entire fund out as cash) in the first full-quarter post-Pension Freedoms was around two in three funds. The most recent figures available at the time of writing show this dropped to around one in two. Either figure is frankly worrying, and could suggest that a large amount of pension savings may actually be used for short-term spending rather than long-term income. For some this will be a sensible financial decision, but others might not appreciate the long-term implications of such a choice.

The reality is that pension freedoms exist and therefore will be used by savers. Given this it is increasingly important that employers provide guidance and/or advice for older workers regarding their pension options. Other organisations may perhaps prefer to introduce a wider workplace financial education programme for all employees regardless of age. Either route should help reduce the number of older workers making poor decisions in the new world of pension freedoms.