It has been almost six years since pensions freedom came into effect, writes Neil MacGillivray, and advisers’ jobs are more important than ever
From the outset SIPPs were considered as a means of making it easier for people to manage their own pension arrangements. But their true potential in wealth management arguably took a further 26 years to develop through the introduction of pension freedoms in 2015.
Many feared it would quickly go downhill from there, with wild headlines of SIPPs being fully encashed and Lamborghini dealerships booming. I’m sure the odd supercar was purchased, but the view that people couldn’t be trusted with their own money was greatly exaggerated. Why? Well, in part because getting appropriate financial advice overcomes impulsiveness, and advice around the freedoms doesn’t just stop there.
Since 2015, more than £37bn has been withdrawn using the pension flexibilities – approximately 185,000 of your average-priced Lamborghinis.
As a platform with a large book of high net worth advised investors with significantly above average pension pots, we decided to assess how investors reacted to the new flexibilities, especially in securing an income for retirement.
The ‘traditional’ pre-2015 way for an investor to secure an income in retirement when they weren’t a member of a defined benefit arrangement was via an annuity purchase. One prediction around pension freedoms that was accurate was a dramatic collapse in annuity sales. Interestingly, annuities regained some traction back in 2016, which is likely to have been a tactical move by people to secure an income during the fraught political and economic uncertainty of that time.
Jumping forward to today when the FCA recently reported that only 69,500 pots were accessed in 2019/20 in order to purchase an annuity, down 6% on the previous year, as the dramatic decline of annuities continues.
The main element of the reform that prompted concern over retirement savings being frittered away was the ability to take full pension withdrawals. In 2014, the full withdrawals reflect those who withdrew their funds to buy an annuity (as we don’t offer this product on the platform). No surprises on this move to an annuity, as for most people this was their only real option.
Come 2015, the number of full withdrawals rocketed. Again, no real surprise, as for investors the removal of both restrictions on how someone could access their pension, and the level of income allowed, led to what could only be described as euphoria.
Advisers have always played a critical role in pension planning, and the new flexibilities have made it even more important to seek appropriate advice for maintaining income in retirement.
Pensions are at the heart of later life planning, but the government hasn’t made them the easiest to love. Constant intervention and tinkering with pensions have undoubtedly turned investors off, and so financial advisers are necessary to first help cut through the complexities and second to continue to encourage people to plan effectively for retirement.
While I believe pension freedom is a great thing and has been mostly beneficial to investors, I can’t help but think the freedoms may look very different in the future.
The news that the Work and Pensions Committee has raised an inquiry into the impact of freedoms and the level of protection for pension savers makes it feels like changes are already on the cards and, if that is the case, advisers will be needed more than ever to help people navigate through those uncertain times.
Neil MacGillivray is head of technical support at James Hay