A COUPLE of months after they were introduced, there are signs that the Government’s pension reforms are taking some time to bed in.
The changes, which were introduced on April 6, allow pensioners to cash in their pension pots, enabling them to do what they want with their money.
Recent media reports, however, have highlighted situations where over-55s have been restricted from taking out portions of their money.
As a result, the Chancellor of the Exchequer, George Osborne, said this week that he was looking at capping penalty charges levied by pension firms on people seeking to access their retirement savings early.
“There are clearly concerns that some companies are not doing their part to make those freedoms available,” he said.
“We are investigating how to remove barriers and we are considering now a cap on charges and I am asking the Financial Conduct Authority to investigate. People who have worked hard and saved hard deserve a better deal.”
The Treasury also said it would look at making the process for transferring pensions from one scheme to another quicker and smoother.
All of which may help with take-up of the new freedoms. Conservative estimates made by investment management company Hargreaves Lansdown before the pension changes came into force suggested that as many as 200,000 people would seek to cash in their retirement savings.
So far, however, the figure has fallen well short of that; 60,000 savers have taken advantage of the freedoms, cashing in £1bn – equal to £100m a week.
When the changes were first announced, there was much talk about people blowing their pension pots on Lamborghinis – something former pensions minister Steve Webb famously said he was “relaxed” about.
It’s too early to say with any authority what people are spending the money on – although some have tried – but research by Hargreaves Lansdown has given us some clues.
In a survey of spending intentions, it found that investors have gravitated towards more considered choices over time. Many of the items on the shopping list were unsurprising: 10 per cent wanted to buy a new car (not necessarily a Lamborghini), while others wanted to give money to family, pay off the mortgage, make home improvements and take a holiday – in ascending order.
Twenty-three per cent wanted to re-invest the money in an ISA, and more than 10 per cent wanted to buy a holiday home or a buy-to-let property.
But tellingly, the largest proportion of retirees, 29 per cent, intend to use the money for general living expenses – suggesting that fast cars are about the last thing on these people’s minds.
This may also explain why only 36 per cent of 55-65 year olds think it likely they will seek financial advice on how to spend their pensions, according to a recent Brewin Dolphin survey conducted by YouGov. After all, how much advice do you need if you’re spending it on the groceries?
Nevertheless, Hargreaves Lansdown’s survey reveals the reforms to be very popular.
Tom McPhail, head of pensions research, said: “We’re seeing high levels of engagement and very positive feedback from investors. The pension freedoms are working well, however we don’t think that transactions have yet settled down into a ‘normal’ pattern. The current high levels of drawdown and UFPLS [Uncrystallised Funds Lump Sum Withdrawal] transactions are likely to still be the pent-up demand held over from 2014/15.”
Among those retirees spending their pension pots on things other than day-to-day living, there is an increased demand for clear guidance, says Richard Harwood, divisional director of financial planning at Brewin Dolphin in Leeds.
“There are a lot more people seeking straightforward advice. Many current pension arrangements are just not suitable,” he said.