Last week Chancellor George Osborne hailed the success of the pension freedom reforms by informing Parliament that more than £1bn of pension investments have been withdrawn since April this year.
While the reforms have undoubtedly been a boost for the retirement savings sector and for customers who use pensions as a vehicle for long-term saving, is this a sensible measure of success ?
A better gauge would be how many consumers are first speaking to a Financial Adviser, or perhaps to the Government’s Pension Wise service, in order to make better-informed retirement income decisions. At this stage the Government has not disclosed those figures.
The Chancellor’s claim that £1bn has been encashed by 60,000 people so far in this tax year, indicates an average encashment of £16,666. In many cases, clients could, without the new freedoms, have received these payments using ‘small pots pension payment’ rules anyway. Without knowing who has conducted these transactions and why, it is difficult to agree with Mr Osborne’s verdict that they constitute ‘success’.
A rough calculation suggests a minimum of £72.8m has been paid in tax on pension income since April. This is based on an assumption that individuals taking pension income flexibly do not have other taxable income. In reality, many will have state pension income, salary , or other income, on top of their pension withdrawal. But even at this conservative estimate, the Government would be set to take £436m over the whole tax year from flexible pension withdrawals – much more than the £320m the Government first estimated
One of the key risks to consumers is that they underestimate the tax they will pay on pension income withdrawals. Last week’s HMRC pension update shows that people are struggling to make sense of the complicated forms to reclaim overpaid tax. It is unfair to judge the success of the pension freedoms without also disclosing how much people are paying in income tax on their withdrawals.
The UK has a problem with saving, not spending, and the Government should not use pension encashment figures as a tool for political point-scoring. A more detailed analysis of consumer behaviour will likely show that some mistakes have been made and the pension freedoms will inevitably result in some pension savers making expensive choices.
As the initial hype dies down and a more realistic picture begins to form around the impact of pension freedom, we will hopefully see consumers and politicians measure the accomplishments of the reforms based on the extent to which retirees are able to build sustainable retirement income plans. This should lead to an environment in which more people look for support and advice in making the most of their opportunities in retirement. This would be the true sign of pension freedom success.