The coronavirus pandemic has forced people to take from their pension pots in a bid to keep financially afloat.
But unfortunately, the lack of knowledge around pension freedoms five years on from its anniversary is still a big problem.
Standard Life recently surveyed 2,825 adults and found 51% of Brits aged 55 and over admit they know little about the pension freedom rules.
A further 10% of over 55s said they know nothing about the changes, while only 34% can remember the changes taking place.
However, almost two thirds of Brits (62%) that currently receive financial advice said they have detailed knowledge of pension freedoms, compared to a third (33%) of over 55s that have never received financial advice.
No surprise
“It is of no surprise that half of Britons know little about pensions freedoms or for what greater freedom were truly intended,” said Keith Richards, chief executive of the Personal Finance Society (PFS). “These complexities, and the rushed way in which pension freedoms were introduced in 2015, mean that though high-quality advice and guidance is available, public awareness is still low.”
Gaynor Lyth, partner and financial planner at Beaufort Financial, said: “50% of people aged over 55 almost certainly do not have a financial planner looking after their finances and helping with their retirement planning. As a result, it’s no wonder so many have not heard of pension freedoms.
“There is also every chance that a high percentage of the same group will not realise that their state pension age has risen to age 67 or even 68.
“Given these facts, it’s a frightening scenario that people might dip into their pension funds to buy cars, pay the mortgage and debts off, help children etc. without any real consideration for the effects such actions could have on their eventual retirement income.”
Dangerous
Standard Life’s research of more than 2,000 UK adults also found 35% of Brits aged between 55 and 64 have already accessed their pension pot, prior to state pension age.
Looking ahead, 35% of adults aged between 45 and 54 said they will probably, if not definitely, take a tax-free lump sum from their pension at some point, and of those, 30% will do so as soon as they hit 55.
How dangerous is it that people can take money out of pension pots and not know what they are doing?
David White, QB Partners director, said: “Very. People need to take advice before taking money from their pension funds.
“They may be unwittingly incurring tax charges and eroding a fund which is intended to provide them with a long-term income in retirement.
“Planning such as uncrystallised funds pension lump sum (UFPLS) which allows people to take multiple lump sums rather than crystallise the whole fund at once may be suitable.”
Richards added: “Pensions freedoms has introduced opportunity, but it also created risks that did not exist with compulsory annuities.
“Two of the key risks are running out of money too soon into retirement, which could not happen with an annuity, and paying a very high tax bill, if too much money is taken out of the pot in a single tax year.”
Pandemic problems
Pension freedoms have created real flexibility in a time of need, and at the moment with people losing jobs and wages cut, they can be a life changer.
But how much strain is this coronavirus outbreak going to put on the pensions sector?
Andrew Tully, technical director at Canada Life, said: “From what we’ve seen, the majority of pension savers are continuing to act rationally and while some people may be tempted to use their pensions as emergency cash machines, we are not hearing of the mad dash for cash that many expected.
“This makes sense as people have been diligently saving into their pensions for years and looking forward to a retirement funded by those savings. Short-term cash needs if required may being met from other forms of saving, for example ISAs.
“It’s likely that for many people, pensions will simply play second fiddle to their overall family health at the moment and this may actually protect them from making any rash decisions which are unlikely to be the right move longer term.”
DB Partners’ White added: “Using a pension fund for short term financial needs should be a last resort. Before doing this people should think about how they can save money or raise money in other ways and if they do need to use savings, use shorter term savings first.
“In the longer term, if the public have used pension savings to fund short term financial needs and eroded their pension funds, there will be more reliance placed on the state.”
MPAA
One of the knock-on effects of using pension freedoms is the money purchase annual allowance (MPAA).
Once someone accesses their pension, they can only put £4,000 ($4,960, €4,426) a year into it in the future.
“We all have a role to play in proactively communicating with members, whether that be advisers, schemes or providers,” Tully added. “Anyone tempted to dip into their pension to help them through any short-term financial problems should be made fully aware of the potential tax implications of doing so, including triggering the MPAA.
“The MPAA has long been viewed by many as an unreasonable restriction. People being able to take some of their pension in this unprecedented situation can be hugely beneficial. In future members may want to make up for those withdrawals by paying in more to their pension, so it seems bizarre the rules may restrict their ability to do so.
“The last few weeks have seen dramatic changes to many rules. Scrapping or amending the MPAA is minor in comparison, but nonetheless it is a change the government should make.”
Beaufort Financial’s Lyth added: “This is the real worry, with a payment limit of £4,000. There are ways around this however, like making use of small pot rules which will allow you to take up to three £10,000 small pots, or just take the tax-free cash.
“Here again, the importance of seeking professional advice from people who understand the rules has to be emphasised.”
Campaign
The only way to improve the UK’s knowledge on pensions is through a nationwide campaign.
But how can this be achieved?
“The campaigns are clearly not as effective as they should be as so many people do not know about or fully understand pensions freedoms,” White said. “More publicity of services such as Pension Wise and more encouragement for the public to take financial advice.”
PFS’ Richards said: “The Personal Finance Society has recently written to the chancellor calling for a joined-up consumer awareness and education programme to better support the public and help millions of people who would otherwise be sleep walking into a retirement of financial stress.
“We need co-ordinated action across government, regulators, and the entire pensions sector, including making more information available in the workplace.
“Education campaigns can be effective and whilst free guidance can play an important role, strong signposting to professional advice and what to expect and how to access it is essential.”
Lyth said: “We need better financial education in schools about savings, mortgages, and pensions.
“We are seeing this start to happen; however, this is too late for those in work. We would like to see far more employers putting on workshops and presentations for their staff, giving them a better understanding of pensions and finances in general.”
