by Ian Campbell
Director & Chartered Financial Planner
2015 might seem like a lifetime ago now, but it was of course the year that changed everything for pensions.
It was when the Conservatives introduced sweeping reforms giving people more freedom and choice about how they could access their pension pots at age 55.
So how does this landscape look, over five years on?
At the time, there was much speculation in the hallowed halls of Westminster as to whether we were grown-up enough to be given the responsibility of accessing our savings at that age, and either spending it or reinvesting it in any way we liked.
This prompted the then pensions minister, Steve Webb, to quip that he felt sure we wouldn’t go straight out and blow the lot on a new Lamborghini.
Well, if you really do feel the need to go from zero to 202mph in 2.9 seconds, the Lamborghini Aventador will set you back a cool £355,675 this year, and that’s not the dearest one. So one of Steve’s handlers gently took him aside and whispered that the average British pension pot is about £30,000. That’s about enough for a Lamborghini wheelnut.
No wonder, when Steve stepped down in 2015 to join Royal London, one of his going-away gifts was a coffee mug with a picture of him sitting in a... Lamborghini.
From tangle to thicket
However, Steve was right. The figures show we have mostly been sensible and responsible in how we access or ‘draw down’ some of our pension savings.
HMRC tells us that in the first three months of 2020, some £2.5bn was withdrawn flexibly from pensions. Average withdrawals per person were £7,100 during the quarter, down from £7,300 in Q1 2019.
The problem, however, is that increased flexibility means an increase in the ‘terms and conditions.’ The rules, which used to be a complex tangle, have now become an impenetrable thicket.
Remember that most of what you draw down is taxable. In the area of pensions drawdown, the danger of incurring a large and unexpected tax liability, or leaving yourself with less than you need for your desired retirement, means that quality financial advice has never been more essential.
Just think about the ravages of inflation
As one of our clients put it recently, “It’s not until you start to think of it in terms of how much a pint of beer might cost then, that you realise you have to really plan things properly.” There really are 101 things to think about, if you are going for drawdown.
If you’re reading this while enjoying your evening G&T (Gordon’s, naturally), then here is a sobering thought: in 1960 a pint of beer cost 11p, and a loaf of bread cost 3p. Today, thanks to inflation working away in the background for 60 years, those prices would buy you a sip of beer and half a slice of bread.
Would you like some advice on how to keep one step ahead of inflation?
If you choose to draw down your money to reinvest it, you’re entering an equally complex minefield. When it became apparent that thousands of over-55s were suddenly in possession of large sums, the scammers wasted no time in coming up with a range of dubious or non-existent investment schemes, from property investments in Florida (beyond the reach of the UK regulator) to very convincing but bogus diamond investments.
Even with genuine investments, choosing the one that’s right for you, and equally importantly, understanding the costs and charges involved, can be a nightmare without quality financial advice.
For investment funds, there were 44 different charges possible this year, said the Financial Conduct Authority (FCA), and even their normally staid boffins called these charges “complex, opaque and hard to compare”, adding that “consumers are now required to make more complicated decisions than ever before.” Strong words, indeed.
These are lifetime decisions
Simply put, if you’re taking stuff out, you have less left, and you have to be careful what you’re doing with it. How much will you want to spend, when you are 80? Remember, £5.57 in 1960 would provide the same spending power as £100 today, and the Office for National Statistics’ data indicates that pint of beer could be £8 by 2060, if prices continue to rise at their current rate.
The bottom line is that, if reinvesting, you need to find the right new home for your money. This means analysing the options with the insights that are available only to a financial adviser.
Or as the senior economist at the Institute for Fiscal Studies put it: “Pension freedoms also involve the freedom to lose money, when the market turns against you.”
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This article does not constitute financial advice, and should not form the basis for financial decisions, which should be taken only in consultation with a qualified financial adviser. The value of investments can fall as well as rise, and you may end up with less than you invested.