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Your Money: Where do seven years of pension ‘freedoms’ leave us?

Russell Anderson, of Aberdein Considine.
Russell Anderson, of Aberdein Considine.

This month marks the seventh anniversary of one of the most important pieces of personal finance legislation in recent times – the introduction of pension freedoms.

In short, this new legislation allowed savers to access their defined contribution (DC) pension from the age of 55, with significant flexibility on how they can use this money.

Pension options created by these “freedoms” include cash withdrawals.

Following their introduction we saw sensationalist stories about people blowing their pensions, some built up over a working lifetime, on luxury holidays and supercars.

But these situations have been the exception rather than the rule.

Changes led to transfers from ‘gold-plated’ schemes to more flexible arrangements

In addition to providing flexibility on DC pensions, the new freedoms also applied to those fortunate enough to have been a member of a defined benefit (DB) or final salary scheme.

While in DC schemes you paid a certain amount every month but had no guarantee of the pension you would be paid, in a DB scheme you would receive a guaranteed level of pension at retirement age.

In some cases this could be half your final salary or even two-thirds for the lucky few.

No surprise then that DB pension schemes were appropriately referred to as “gold-plated”.

The freedoms led to a growing number of people with large DB pension funds deciding to transfer their pots out of the scheme and into a flexible arrangement.

People could also begin withdrawing their pension pot at 55, rather than waiting until they were 60 – a typical age at which their DB scheme would begin paying out.

All well and good you may say, but during the past seven years we have seen a number of examples where people have been advised badly – in some cases resulting in the loss of hundreds of thousands of pounds.

Perhaps the most high profile case of recent years is the British Steel pension scheme scandal, with the National Audit Office saying many workers were given bad advice and may have made poor choices as a result.

New protections

The Financial Conduct Authority has looked to improve the quality of advice and enhance protection for consumers.

This has included bringing in a ban on contingent charging, where fees were applied only if the transfer went ahead.

Charges are now applied whether a transfer proceeds or not.

In addition, the number of authorised pension advisers has fallen substantially.

The costs involved and reduction in adviser numbers means it is even more important to shop around and do your research before making any decision, so you are fully informed of the costs and service provided.

So were pension freedoms a good idea and, more importantly, should you transfer out of your DB scheme?

It very much depends on your individual circumstances but, ultimately, no one should be in any doubt that transferring out is a huge and serious decision.

It could affect the rest of your life and your ability to enjoy a comfortable retirement.

Pensions are complex and it is for very good reasons that if your fund is at least £30,000, you are required by law to take independent financial advice before making any decision.

Russell Anderson is an independent financial adviser and pensions expert at law firm Aberdein Considine.


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