Pension flexibility – two years on

The Financial Conduct Authority (FCA) has examined the impact of pension flexibility and is worried about the lack of professional advice being taken.

Pension flexibility came into effect just over two years ago in April 2015. In theory, since then it has been possible from age 55 onwards to withdraw your entire money purchase pension fund as a lump sum, albeit generally 75% would be taxable as income. When the proposals first emerged, there were concerns expressed that the temptation to take a pot of cash and spend it would be too great for many. But has this happened in reality? The FCA has been examining the effects of the proposals since 2015, and published an interim report on its findings in July.

The FCA found that over 50% of the pension pots accessed since April 2015 had been withdrawn in full. While this grabbed the headlines, it does not give the complete picture. A massive 60% of those pots were worth less than £10,000, while another 30% were below £30,000. That does not suggest that the worries about people blowing their pension funds on a new Lamborghini have been realised. Indeed, the opposite seems to have happened: over half of those who fully cashed in their pension reinvested the proceeds in other savings or investments.

But what about professional advice?

The FCA noted that reinvesting the proceeds in other savings or investments can “…give rise to direct harm if consumers pay too much tax, or miss out on investment growth or other benefits”.

That danger highlights another concern of the FCA; that many people are not seeking professional advice when it comes to their pension flexibility options. In the FCA’s words, they are choosing “the path of least resistance” and opting for drawdown with their existing pension provider. As the regulator reports, this “may result in [the unadvised] achieving poorer deals”.

If you are considering drawing money from any pension arrangement, you should consider the FCA’s emphasis on the benefits of shopping around and taking professional advice. DIY pension planning can turn out to be an expensive option, even if at first sight it looks the easiest.

The value of tax reliefs depends on your individual circumstances. Tax laws can change. The Financial Conduct Authority does not regulate tax advice. The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.