Pension freedoms two years on


It’s been two years since the introduction of pension freedoms, which have revolutionised the way people plan for their retirement. We caught up with Aegon’s head of pensions, Kate Smith, to find out how people have reacted to the changes and how we can help you make the most of the new options available – both in and out of the workplace - in order to plan for the future.

How have our customers been using this new found freedom and which aspects have been most popular?

Our customers are using the pension freedoms for all sorts of reasons and the changes mean that, for instance, retirees are no longer locked into buying an annuity on retirement. The ability to take up to 25 per cent of your pension tax-free has always been a popular option with retirees, and continues to be so. Now people can access their savings in a variety of ways, including by keeping them invested and drawing an income, or by accessing it all as cash either in one or multiple goes.

Because of the changes, our customers have seen the value in revisiting retirement plans or changing them to make use of the new options available. People are living longer and healthier lives, which means that their retirement can last a lot longer.

As part of these wider pension reforms, auto-enrolment was introduced in 2012 and increasingly, workplace pensions are considered to be at the core of retirement saving. Employer contributions through auto-enrolment are hugely valuable and should be maximised fully, as should the opportunity to engage with your pension in the workplace. At the time of the pension freedoms changes in 2015, half of the UK population hadn’t taken any action to review their retirement plans. This has now fallen to 35.8%, so lots of us are making moves to safeguard our retirement.* Workplace saving plays a huge part here, and we are happy to see so many employees engaging with their retirement savings through the workplace. 

What’s important is having a plan that’s right for you and your needs, and not just for now, but one that ensures you’ve got enough savings to enjoy the retirement you’d always imagined.

Our customers have increasingly been using our Retirement Planner tool to help make their retirement planning easy – showing the value of their savings in retirement and understanding what options they have for taking this money.

Our retirement Readiness Report found that 14% of working age people are saving more into their pension as a direct result of the pension freedoms, equating to 5.5 million people contributing more into private or workplace pensions. It’s really exciting to see so many of our customers engaging with their pension savings and making long-term plans. Who said pensions were boring?

What is the challenge for people saving for retirement?

While pension freedoms have given us all greater choice, in order to make the best use of these opportunities, we need to understand how they can work in our favour in the long-term.

While increased control and access is fantastic for regaining some control over savings and pension pots, it’s key to remember that our retirement years are now longer than ever before, and so require even more planning. Pension providers were initially concerned that one of the biggest challenges customers might face is using up their pots too quickly and that they would be left with a reduced sum of money during retirement. Our article, ‘What does your retirement look like?’ will help you to identify some key considerations to make sure this doesn’t happen.

Thanks to the reforms, how and when customers take their retirement income is up to them. As we talk about in this newsletter, it’s certainly not unusual for customers to acquire multiple workplace pension pots over the course of their working lives. To help you answer some of the common questions you may come up against, I’ve put together a step-by-step guide to getting your finances in order on the next page. 

Are there any common misconceptions?

When I talk to friends, family and customers about pensions, I’m often surprised by how many of them don’t realise that their pensions are actually taxed as income. Any amount above the tax-free cash sum of 25% is taxed at the rate at which the individual pays income tax. Unfortunately, this means that some people are cashing in pension pots which are pushing them over an income tax threshold. For example, instead of paying basic rate tax at 20%, they suddenly become a 40% higher rate tax-payer for that tax year. This is definitely one of the most common pension misconceptions and something that’s relatively easy to avoid.

How important are advisers in helping customers make their retirement decisions?

Retirement planning has never been so flexible and offered so much choice for the future. One thing to remember is, you don’t have to make these choices alone. And, actually, if you are at all unsure, we would always urge you to ask for help.

Pension freedoms mean that there are many more options, which is brilliant. However, with all of these options it could be easy to make a decision that, while suitable for you now, may not suit your retirement needs down the line. 

Advisers play an important role in helping you to create a retirement plan suited to personal circumstances, and making sure that you make the most out of your hard-earned savings.

*- Aegon UK Readiness Report - How savers are behaving in the new pensions world. April 2017