Understanding 'Pension Freedoms'

Before April 2015, individuals holding a pension scheme were often limited with their retirement options. Savings in a defined contribution pension scheme were used to purchase a secure pension for life in the form of an annuity. 

An individual would hand over the value of their pension to an insurance provider in exchange for a guaranteed income for the remainder of their lifetime. In this situation, the individual banking on the fact that they would live long enough to reap the benefit of their savings, while the insurance provider gambling on the individual’s life expectance to pocket any leftover funds. 

Pension ‘Drawdown’ was introduced in 1995 and offered savers the option to keep their pension money invested, while using it to provide an income without the necessity to purchase an annuity. While more ‘flexible’ - limits were still imposed and drawdown was often seen as being for those with significantly large pension savings.

As a result, utilising a pension fund to pay out a more tax-efficient income has become mainstream, and drawdown options becoming a larger part of a Financial Adviser arsenal when looking to support an individual through retirement. 

In the early days of Pensions Freedom, the press quickly started to infer that an individual’s pension could be accessed in a similar way to a bank account. A statement that is simply not true. 

While it is true that people can now ‘access’ their pension savings in a much more flexible manner, the time it takes to receive money will still be dictated to by how, and who the money is with. 

It is important to note, that a number of pension providers offer new pension products that take full advantage of pensions freedom, but a much larger number have retro-fitted old pension schemes with modern options. Sometimes, this leading to older ‘legacy’ schemes needed to be moved to a new pension with a current or new provider first. Adding additional time to when someone might receive their money. 

How a pension is invested also can have a significant influence on timescales, as invested capital will need to be sold to cash before this can be paid out. This can take weeks before a provider is then able to look at paying out benefits. 

It is most important to understand that while accessing pension money has indeed become more flexible, it is important to remember that a pension fund, no matter its form, must be used to support retirement. It is not a bank account and it should not be used excessively.