The new Pension Freedoms have afforded employees much greater flexibility with their retirement planning – avoiding the need to purchase an annuity and effectively enabling the over 55’s to dip into defined contribution pension pots in a similar way to bank deposit accounts.
But they have always had a potential downside.
Since these new rules were introduced in April 2015 experts have commonly voiced concerns that people could spend their pension money unwisely and not leave enough to cope with essential living costs in old age. Furthermore, recent research results published by pension provider AJ Bell demonstrate that such fears are not altogether groundless.
The study of 370 consumers who have accessed their pensions since 2015 estimates withdrawals to have totalled some £17.5 billion and leaves no-one in any doubt that it hasn’t all been spent on basic food stuffs and utility bills!
Whilst it is undoubtedly positive that some £3 billion has been used to pay off debt, another £2.3 billion has been spent on luxuries like holidays, home improvements and cars, and only £60 million has been used for the purposes of funding long-term care.
The property market has been another beneficiary – with £1 billion being used to invest in buy-to-let and £1.2 billion coming from parents wanting to help their children get on the housing ladder. Somewhat less predictably, however, a staggering £4.5 billion has also been moved to low-yielding current accounts or other products like ISAs.
The lack of expenditure on long-term care has at least been subject to mitigating circumstances. Only a small proportion of overall care needs will have arisen during the last three years, so most funding in this respect is likely to be coming from annuities from the old pre-2015 pensions regime. But the trends towards cash and property are certainly worrying.
It is always advisable to have some cash available for emergencies but it is unlikely to make financial sense to have too much sitting on deposit in the long run. Even though the base rate rose last November, it still stands at a paltry 0.5%. An inflation rate that remains above the Bank of England’s 2% intended target is therefore eroding cash savings in real terms.
It some ways it feels like we haven’t really moved on from the days when some people only felt safe if they had gold or cash hidden under their mattresses, and this suggests that many still labour under the misapprehension that a pension is somehow an unsafe place to have your money.
It is therefore important that employees are made aware of just how far things have moved on since the Robert Maxwell and other scandals and realise that pensions have never been more secure and better regulated.
The trend towards investing in property also suggests that many people are unaware of the tax implications of removing sizeable lump sums from pensions – which may in some circumstances result in higher-rate tax liabilities – and that some may not even realise that the income they receive as a landlord is subject to tax.
Most of the savings being accessed under the Pension Freedoms are from small historic pension pots but these are still likely to be a crucial part of the retirement planning jigsaw for older employees. Failure to maximise them may have a direct effect on when they feel they can afford to retire and will also therefore impact on their employer’s succession planning. But these problems can be greatly reduced by ensuring that employees have access to a suitable financial education programme.
Chase de Vere is well placed to help in this respect because, unlike many of our competitors in the employee benefits space, we have an Independent Financial Adviser (IFA) arm.
We are able to offer generic seminars and workshops and even one-to-one face-to-face regulated financial planning advice, and we can tailor a programme specially to suit the needs and budget of your organisation.