A Labour government could signal the end of the pension freedoms introduced by George Osborne in 2015.
Currently, pension savers have the freedom to withdraw as much as they wish from their pensions once they reach the minimum pension age (currently 55, set to rise to 57 in 2028). Typically, this allows for a tax-free withdrawal of 25% of pension savings, with the remaining balance subject to income tax upon withdrawal.
However, emerging data suggests that many savers are using their pension pots to meet short-term cash needs rather than to provide a sustainable income throughout retirement. While it is understandable that individuals want control over their own funds, a future Labour government may adopt a different perspective on this matter.
Labour has historically shown reservations about pension freedoms. Although they cautiously accepted the reforms upon their announcement in 2014, a subsequent report commissioned by Rachel Reeves and published in 2016 hinted at a more restrictive approach. This report identified the risks associated with pension freedoms, portrayed income drawdown as high risk, and suggested directing savers towards safer products approved by regulators.
The Financial Conduct Authority (FCA) maintains data on individuals' transactions with their retirement savings, updated semiannually. The latest report confirms a trend of individuals cashing in smaller pension pots in one go. In fact, full encashment of pots valued at less than £30,000 surpasses all other types of transactions combined, such as annuity purchases and drawdown.
This aligns with research from the Department for Work and Pensions (DWP) from a few years ago, indicating that individuals tend not to consider individual small pension pots in the context of their overall retirement savings or long-term income needs. Additionally, people often underestimate their life expectancy, leading to short-term decisions that may not be optimal in the long run.
The FCA data further reveals that, for all income drawdown pots valued up to £250,000, the most common rate of income withdrawal exceeds 8% per year, a level unlikely to be sustainable in the long term. Moreover, uptake of the government's free retirement guidance service, Pension Wise, is declining.