Are you thinking of drawing on your pension funds at this difficult time, taking advantage of your pension freedom? Or are you someone who doesn’t understand what ‘pension freedom’ means? Read on…
‘Pension freedom’ has become a recognisable shorthand term for the tax reforms that removed restrictions on taking pension cash.
The policy was announced in Parliament by the then Chancellor George Osborne with the words: “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want.”
Do you dream of financial freedom?
Before we talk about pension freedom, what do you understand by the term ‘financial freedom’?
It probably conjures up ideas of having enough dependable income or sufficient assets that allows you to enjoy a comfortable lifestyle. Never having to worry about where to find the money to pay regular bills or sudden expenses.
So why isn’t everybody celebrating this new-found pension freedom!?
Now think about the phrase ‘pension freedom’. What thoughts do those words provoke? Are you now thinking about peace of mind and security in later life? Or more about being able to access pension cash, as and when you want?
We all love freedom, right?
Using the ‘f-‘word could be regarded as a linguistic masterstroke. It is hard to find anyone who will argue that having more freedom is a bad idea.
So why isn’t everybody celebrating this new-found pension freedom!? Well, there’s three main issues…
The first problem is that it depicts pensions as prisons, keeping us from our own money. In reality, pensions are more like fortresses guarding our long-term savings. They allow long-term investment growth with strong protection. Against paying unnecessary tax, fraud, and even our own short-termism.
The short-term lure of cash pots
The second problem is that if people are focused on easy access to pension cash – particularly tax-free cash – they are less likely to hunt around for the best deal. That can leave funds languishing as cash, or in high-charging or unsuitable investments that reduce future returns.
Lack of understanding
The third problem is that pension freedom has shifted the responsibility for making decisions on to individuals. Many of whom are not actively engaged in their retirement savings plans. Or may be unaware of the pros and cons of different choices.
It’s your risk now
The fourth problem is that freedom has also shifted the key risks, once borne by pension schemes or annuity providers, on to the individual. Risks that investments will perform poorly, that inflation will erode the value of the fund, or that someone may outlive their savings. Schemes can pool these risks across many members, but individuals are on their own.
There is help coming
To overcome some of these problems, financial regulation is being beefed up with a raft of new requirements, such as limits on charges and investment ‘pathways’ that are designed to offer people sensible choices at reasonable cost.
In the meantime, the free, impartial and independent pension guidance offered by Pension Wise is highly regarded by users and is an important first point of contact for anyone thinking of accessing pension cash.
And whilst full face-to-face financial advice may be too costly for those with more modest pension funds, financial technology (fintech) is coming to the rescue. Positive consequences of the Coronavirus lockdown could be wider acceptance of digital and online services such as robo-advice.
These services must meet the same stringent regulatory standards as face-to-face advice. For example by offering personalised recommendations based on the user’s unique circumstances. But will be set at more modest costs, in terms of initial and ongoing fees.
Pension freedom has been sold as the right to grab pension cash when you feel like it
Pension freedom has been sold as the right to grab pension cash when you feel like it. But true pension freedom – what people heading towards retirement really need to think about – is the same as concept as financial freedom.
It is the freedom that comes from knowing that the pension money you need to pay the bills will never stop nor run out.