In 2015, then-chancellor George Osborne’s Pension Freedoms legislation came into force, billed by the government as a “revolution” in pension design.

The changes effectively allowed retirees to access their whole pension fund from the minimum retirement age of 55 (set to rise to 57 in 2028). This represented a significant contrast to the inflexible but stable pension annuity – until that point, seen as the “traditional” way to fund retirement – and wasn’t welcomed by everyone.

While many saw flexibility as inherently good, detractors worried about the need for self-budgeting throughout a long retirement. They feared that pensioners would be unable to manage, spending their money on world travel and sports cars before duly running out, putting pressure on the State and leading to pension poverty.

So, 10 years on, what has Pension Freedoms meant for retirees and the UK pension landscape? 

Keep reading to find out.

A seismic change brought increased flexibility and responsibility

Before 2015, a defined contribution (DC) – or “money purchase” – scheme provided a pot of money that was used to purchase an income for life. This was paid in the form of a pension – an annuity. 

Once you agreed to an annuity quote, you knew exactly how much pension you would receive each month or year and could budget accordingly, confident that you would receive this stable amount for the rest of your life.

Pension Freedoms threatened to shatter this stability, sparking concern from many quarters.

The legislation introduced the option to take whole pots in one go, as a lump sum known as an “uncrystallised pension fund pension lump sum” (UFPLS), or to draw down income as and when you needed it. Some in the industry worried that this would lead retirees to spend irresponsibly, running out of money when they needed it most.

The Times quotes figures from AJ Bell, stating that nearly 7 million pension pots have been accessed since 2015 (worth around £83 billion) with around half having been withdrawn completely. 

So, what has happened to this money and what lessons can we learn?

2 simple lessons we learnt from retirees’ responses to Pension Freedoms

 1. Retirees can mostly be trusted to budget responsibly, but advice is essential 

Standard Life has looked at Pension Freedoms legislation and, specifically, at how retirees used the money they flexibly accessed.

The survey found that:

•    28% reinvested the money, through a property purchase, say 
•    24% used the money to ease day-to-day finances
•    21% opted to pay off debt.

The predicted splurge on sports cars and luxury goods didn’t occur, suggesting that retirees can indeed be trusted to spend their own money wisely. 

But what about the tax-free cash element of your retirement income?

As you are likely aware, you have the option to take up to 25% of your DC pension pot tax-free.

Royal London confirms that:

•    32% of those accessing tax-free cash used it to pay off a home loan or other debt
•    26% deposited the money in a current or savings account.

Interestingly, there is a warning here, and the latter figure highlights the need for professional financial advice before making important retirement decisions. 

Tax-free cash withdrawn and not spent is at the mercy of rising inflation, which reached a 41-year high back in October 2022. Money sitting in a low-interest account at this time would have lost value in real terms, significantly reducing your spending power. 

It’s important to access tax-free cash only when it is earmarked for a specific purpose, leaving the rest invested to benefit from potential growth and the effects of compounding.

2.   The traditional annuity is far from dead but combining stability and flexibility could be a good option

FCA figures, quoted by the Times, confirm that between October 2015 and March 2016, 16% of at-retirement decisions to release pension funds resulted in an annuity. For the same period in 2023/24, this figure had fallen to 10%.

But the annuity is by no means dead. 

MoneyWeek finds that rates recently hit a 16-year high and this increase has been reflected in sales. Indeed, Professional Adviser states that sales reached £7 billion for 2024, a 34% increase from 2023. The number of annuity contracts, meanwhile, hit a 10-year high.

So, while flexibility is key for retirees post-Pension Freedoms, stability is important too. 

This has been especially true in the wake of recent global events like the Covid pandemic and subsequent cost of living crises, which highlighted the need to be prepared for the unexpected. 

For this reason, you might find that a mixture of Pension Freedoms options and the regular income of an annuity works well for you. Using this combination means that the former can be used to cover one-off expenses and luxuries, especially in the early active years of your retirement, while the latter is used to cover fixed known expenses like bills.

Get in touch

The retirement decisions you make are important and can have far-reaching consequences. For this reason, taking the time to seek professional advice is key.

We’re on hand to offer guidance so that you can be confident you have all the available information and can make the “right” decision for you. Please get in touch at info@macfp.co.uk or call 01349 832849 to see how we can help make your dream retirement a reality

Please note

This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
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.