In April this year, pensions received a makeover Trinny and Susannah would have been proud of.
Described as a revolution, the new pension freedoms aimed to wipe a tatty slate clean and give everyone as much choice with their retirement income as they could want. Pension savers are now treated like adults; to spend as much or as little of their hard-earned savings as they wish, when they want; to put them in control of their money.
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Based on the first 100 days, the way investors access their retirement savings is changing very rapidly. For many investors the new rules are working well; they are increasingly taking advantage of the freedoms to make a managed transition from work to retirement.
Whereas two years ago, 90 per cent of those retiring converted their pension into a guaranteed income for life using a secure but inflexible annuity, now only around 10 per cent are making this choice. Most favour leaving their pension savings invested and drawing money out as they need it via an income drawdown plan – a more risky, but more flexible approach.
However, the freedoms aren’t for everyone. Defined benefit or final salary pensions have guarantees which are usually too valuable for it to be sensible to cash them in anyway. Those who have already retired and have already bought an annuity also can’t cash in - although the government is looking at ways to make this happen.
The pension savers who are being unfairly denied access to the freedoms often suffer a double whammy: older pension plans with providers not offering the new flexibilities and who don’t make it sufficiently easy for their customers to take their money elsewhere. Archaic charging structures mean penalties for moving can be up to 20 per cent of the value of a pension pot.
Clearly providers should not restrict those who want to move to the low cost and highly flexible pensions of today. The government has launched a consultation today looking at exit penalties and pension transfers, to ensure that all those who wish to take advantage of the pension freedoms can do so, without losing a chunk of their pension pot in charges.
The barriers to pension freedoms need to be removed so that investors who have shopped around can move their money quickly and cheaply, without having to pay unreasonable exit penalties. We need a transparent and competitive retirement market where informed investors are freely able to shop around for the solutions which will suit them best.
Unreasonable and archaic exit penalties have been a thorn in the pension saver’s side for many years. This consultation serves as a wake-up call to those providers who still think pensions born in the 1990s are fit for the 21st century.