Up until 2015, savers in the UK were heavily restricted as to what they could do with their pension pot. Their choice was limited to which annuity they could take along with a small cash lump sum. With many people unaware that they could shop around for an annuity provider, pension providers often offered poor annuity deals which resulted in many people not having the retirement income that they could have.
However, in 2015 the Chancellor George Osborne announced pension freedoms, where people would now be free to choose how they invested their pension pot. This means they could choose an annuity, an ISA, invest in property or even spend it. The idea behind pension freedoms is that every person's financial circumstance is different and by giving them a free choice as to what to do with their pension pot, it gives them the flexibility necessary to plan for a financially secure retirement. Speaking at the time, George Osborne said:
"People who have worked hard and saved all their lives will have the freedom to make their own informed choice about what to do with their pension in retirement. For many that may well mean taking out an annuity – or, from April 2016, cashing in an existing annuity in payment.
But it could also include being able to draw down their pension a bit at a time or taking it all as a lump sum. People will also have the peace of mind knowing their loved ones can inherit any remaining pot free of the punitive death tax on pension pots, which I abolished last year. This is about more than reforming the rules around pensions.
It is about understanding that hardworking people should be trusted to look after their own savings. It's your money."
However, with the news from HMRC (Her Majesty's Revenue and Customs) that 1.5 million people have so far withdrawn £9.2 billion from their pension pots, it has raised some concerns as to whether people are being responsible with their new pension freedoms.
Fortunately, when the figures are analysed, it does seem that people by and large are being prudent with their pension pots. The average withdrawal is now £6000 per year whereas in the first year of pension freedoms the figure was closer to £15,000 which points to savers becoming more cautious, prudent and financially savvy. In these early days though of pension freedoms, only time will tell if savers will be responsible enough with their pension savings.