“The best thing you can do with your pension now, after freedoms, is actually nothing. Don’t take your money out until you absolutely need it. Pensions are precious. They are the last money you should ever spend. Spend your ISA, downsize your house.” Baroness Ros Alltmann, former Work & Pensions Minister.
This quote from former Works & Pensions Minister Ros Altmann is somewhat misleading, in my opinion. As a government minister Dr Altmann attracted widespread criticism not only for hew views on pensions, but for her criticism of colleagues with whom she disagreed publicly.
Pensions are an excellent and tax-efficient way of saving and if you are able to leave them intact then all the much better. But what Altman fails to recognise is that not everyone has that luxury. Some – usually the less well off or the less well informed – structure their retirement funding differently. Let me explain…
Ever wondered how other people have dealt with the government’s pension liberations? You may recall that from April last year, the new pension regime allowed you to access 25% of your pension pot from age 55 to do exactly as you please with and also removed the obligation to purchase an annuity. Pensions Minister at the time – Steve Webb – was much quoted in his remark: “If people do get a Lamborghini, and end up on the state pension, the state is much less concerned about that, and that is their choice.”¹
So what did people do?
The Affluent took action – but not for Lamborghinis
Research conducted by the Pension and Lifetime Savings Association (PLSA)² identified three groups:
Actioners – the early adopters, a distinct and affluent group, many with experience of self-invested personal pensions (SIPPs) or income drawdown (Investing beyond retirement to provide income streams, as opposed to buying an annuity at a given time and accepting its returns to provide a defined, regular income in retirement)
Investigators – those who are assessing their options – the largest group – with limited experience of drawdown and limited Defined Contribution (DC) savings* but largely reliant on DC and other savings for an income in retirement.
(*DC – pension schemes that have a fixed contribution but whose values fluctuate according to investment returns)
Inactives – the most vulnerable group, many still working, and the most reliant on their DC savings to provide an income in retirement – but with the lowest levels of financial confidence.
Income drawdown was the most popular decision for the actioner group with only a minority taking the cash purely to spend it. But these early adopters are not a representative sample of society as a whole. They are more affluent, financially confident and well-versed in the world of pensions than those who will follow them.
What about everyone else?
Only 23% of the survey group simply took some or all of their pot as cash lump sums. A very small number combined more than one activity. Those who took cash have generally saved or invested the money with a minority opting to pay off debt. Very few have invested in property, with only 10% saving or investing their cash withdrawals in this asset. Only a minority of savers are taking cash only to spend it. However where this occurred, home improvements were the most popular way of spending the cash followed by one-off expenditures on holidays or cars.³
The report “No More Normal”³, which followed the research commented that “Broadly speaking, those investing in drawdown arrangements appear to be drawn from the group with the highest levels of DC pension wealth whereas those taking cash only appear to be drawn mainly from the group with the least DC pension wealth.”
So – you will see why I began the blog by questioning Ros Altman’s generalisation about how to deal with pensions freedoms. Hang on to your pension come what may – works for our first group – the actioners, because they are better informed and wealthier. But the other two groups may not have that opportunity or that luxury. Everything is not equal.
We have advised clients who fall into all three groups identified by the PLSA over the last year or so. Please do recommend us to friend or family member in need of some help. Thank you.
Click here to view the infographic: Pension Freedoms: What have people done?
Thanks for reading. If you have any questions please get in touch.
Partner, Clifton Nash