New figures show people are making the most of the freedoms, with a record-breaking number of payments made in Q3
HM Revenue & Customs’ most recent figures show a total of £21.7bn has been cashed in from pension pots since the freedoms were introduced in April 2015.
Although the information from 2015 is not complete due to changes in reporting requirements, there has been a steady increase in the funds being withdrawn year on year. Almost five million withdrawals have now been made using the pension freedoms.
April to June this year saw the peak total value of payments in each quarter of the past three years.
There was a slight drop-off in the value of payments made in the past three months but this still amounted to just under £2bn accessed via 585,000 withdrawals – the highest number since records began.
So people are clearly making the most of the freedom and choice regime. But is such unrestricted access to pension funds a good thing? I would say yes, for more than one reason.
Firstly, pensions as a concept in this modern world of constant change need trust. Trust in the pensions system has been eroded over the years, rightly or wrongly. You gain trust by trusting others, in this case trusting people with their own money. The government took a bold step giving back control of pension funds to those who have saved their hard-earned money into them when it brought in the freedoms. We are still only a few years in but, while there have been some teething problems and some large sums of money have been withdrawn, it has so far not been the free-for-all that some predicted.
Secondly, the restrictions we faced before the freedoms were causing more issues for those who have built up multiple small pots throughout their careers.
Being able to dip into the funds when it suits or getting access to larger sums early on in retirement has helped many who would have been stuck paying off debts while receiving just a small pension annually. The interest saving for a lot of people must have been significant.
On the flipside of all this, though, the ability to access large sums of money in a single transaction has provided an additional, lucrative target for scammers.
When income was limited, and the norm was regular income for life, scammers could not access pension funds. Now they can target individuals, coercing them to cash in their funds with the promise of better returns or more exciting investments, only to run off with them (and after they have been taxed as well).
As clients have the right to access these funds, providers may be unaware of what they intend to do with them.
But apart from education and warning, there is little else that providers can do.
There is no doubt about it, pension freedoms need to be embraced. And the government, providers and advisers need to do what they can to educate and protect the public from making mistakes.
Right now, this appears to be working, but only time will tell.
Claire Trott is head of pensions strategy at Technical Connection