When a chancellor stands up to make their Budget speech, it’s rare that they will say anything surprising.
Of course, they will try and hold back a big announcement to steal a march on the opposition, and leave their own side happy. But in the era of the 24/7 news cycle, and with the ever-present temptation to leak good news, the speech and contents are usually well-known in advance.
A notable exception to this was George Osborne’s Budget in 2014.
When he announced the Pension Freedoms regime, which came into force a year later, even many ministers in the then-coalition government had no idea that this had been planned.
Because pensions are rarely seen as being “sexy”, there was no massive public reaction, and the mainstream media simply reported it as fact, rather than digging too far into the implications.
However, I can vouch for the fact that, in the financial services industry, the general reaction was stunned amazement as we got our heads around what it meant – nothing less than a complete change to the retirement landscape.
Pension Freedoms simplified the rules around drawing income from your pension fund
Defined benefit (DB) pension schemes, which pay you a pension based on your income and length of service, were largely unaffected by the changes. However, defined contribution (DC) arrangements, including all personal pensions, were impacted.
Up until 2015, as a DC scheme member, you would have typically had to purchase an annuity with your pension fund to receive a regular income in retirement.
This meant that you were at the mercy of prevailing annuity rates at the time of your purchase, which determined how much income you would receive.
While income drawdown offered a more flexible alternative, there were still limits on the amount you could draw from your fund and the frequency these withdrawals could be made.
Pension Freedoms removed any obligation to buy an annuity and any restrictions on the amount you can withdraw. It effectively created a new regime with just two rules:
- You cannot draw any money from your fund until you reach age 55.
- You can take as much as you want from your fund. The first 25% of your fund can be taken entirely tax-free, with the remainder subject to Income Tax at your marginal rate.
With the exception of subsequent confirmation that the age limit will increase to 57 in 2028, those rules still apply.
Pension Freedoms create valuable flexibility around your retirement income planning
In effect, Pension Freedoms give you the ability to customise your retirement income based on your own circumstances and needs.
You can choose how and when you can access your fund, and the amount you can draw from it, subject to the restrictions set by the two points above.
It means that you are not required to purchase an annuity at any time (although you still have the option to do so), and can simply draw the amount of income you need, while leaving the remainder of your fund invested.
There is also the option to tactically utilise your 25% tax-free cash from your fund to support your income planning. So, while you can take it as a lump sum if you want to, you can also draw it in tranches for specific uses, or “drip-feed” it as income to maximise the time it’s invested.
The flexibility around how much you can draw from your fund can also help you from a tax planning perspective. You can create an income strategy through spreading the withdrawal of your tax-free cash, flexible withdrawal amounts and income from other tax-efficient sources, such as ISAs, to mitigate your Income Tax bill.
Despite the freedoms available, you may still benefit from purchasing an annuity
The biggest immediate impact of Pension Freedoms was on annuity purchase.
According to the government, in the year before Pension Freedoms, 90% of pension funds accessed were used to purchase an annuity, yet by 2019/20, this figure had declined to just 10%.
However, despite the freedoms available, it’s important not to totally disregard using annuities. Indeed, recent changes have meant that they could still form an important part of your retirement income planning.
For example, improved annuity rates have meant that, according to the Association of British Insurers (ABI), the sale of annuities increased by 24% in 2024 as many retirees looked to secure a guaranteed income for life.
Furthermore, you may find it advantageous to purchase an annuity with some of your fund to provide you with a secure income that will increase in line with inflation each year.
You can then invest the remainder of your fund and access this flexibly or earmark it for specific purposes, such as care costs.
Additionally, the recent change in Inheritance Tax (IHT) rules announced in the 2024 Budget mean that pension funds will become liable for IHT from 2027. Because of this, you may want to purchase an annuity purchase to provide a retirement income, while removing some or all of your fund from the value of your estate.
Find out more: How the Budget could affect you, and what you can do about it
The changes have highlighted the importance of expert advice
The additional flexibility you have gained as a result of Pension Freedoms can clearly be seen as a positive. But equally, it makes your decision-making even more important.
For example, when you are creating your income strategy, there are a range of issues that you need to take into account. These include:
- Your longevity, dictating how long your fund will need to last
- How you intend to spend your retirement years
- How much you have in your pension fund, along with other assets
- Your investment strategy throughout your retirement
- Making your income as tax-efficient as possible.
The potential for you to make avoidable mistakes in your planning process makes it important to get expert guidance. However, despite these challenges, Financial Conduct Authority data indicates that just 30% of people accessing their pension for the first time took professional financial advice.
Furthermore, the advice you get should be ongoing throughout your retirement. As your circumstances change, or you acquire new and different objectives, you will need to adjust your plans accordingly.
Get in touch
The Pension Freedoms legislation is clearly a positive and can improve your retirement outcomes, but it makes effective and robust planning imperative.
If you would like to talk about your own retirement plans, please get in touch.
You can contact us by email or, if you prefer to speak to us, you can reach us in the UK on +44 (0) 208 0044900 or in Hong Kong on +852 39039004.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
This article is based on our understanding of current HMRC rules, which can change.
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