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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

A look at how the market has changed since of pension freedoms launch

Two years ago the Government tore up the retirement rule book, introducing rules which allow anyone aged 55 and over to spend and invest their pension pot as they see fit.

Let’s take a look at some of the key trends as the retirement market continues to evolve.

1. Drawdown replaces annuities as default retirement option.

Prior to the introduction of the pension freedoms in April 2015, most savers were shoehorned into annuity contracts which were often ill-fitting. The reforms have shaken the retirement income market to its core, and now we see drawdown sales outstripping annuity sales by roughly 2:1.

I expect the debate to now shift to this part of the market as policymakers look at ways to protect savers from withdrawing their money at unsustainable rates.

2 Number of policies accessed for the first time beginning to stabilise.

There was an inevitable bulge in flexi-access withdrawals in the initial phase of the pension freedoms as those who had delayed their retirement income decision following the 2014 Budget announcement moved to access their pot.

While over 218,000 pots were accessed for the first time in April-June 2015, the figure has subsequently been in the range of 130,000 to 160,000.

Money Matters TOM

3 Vast majority of pots accessed are fully withdrawn…but that’s not necessarily a bad thing.

Since the freedoms were launched most savers who have accessed their pension for the first time have withdrawn the entire pot. This might explain why the Government’s coffers have swelled far more than initially anticipated.

Pension withdrawals are taxed as income, so bigger withdrawals generally means more tax for the Treasury.

The vast majority of full withdrawals are from very small pots (below £10,000), which in many cases will be a perfectly sensible decision – particularly if those people have other savings elsewhere.

4 Around two-thirds who enter drawdown take regulated advice.

Retirement income decisions are complicated, with savers having to build an investment and withdrawal strategy based on a number of uncertainties – not least how long they might live.

Advice can be extremely valuable, so it is good that many people entering drawdown are speaking to an adviser.

Take-up of advice in the annuity market – where the buying decision is irreversible – sat below 50% in the third quarter of 2016.


Tom Selby,
senior analyst, AJ Bell

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