Pension Freedoms reframed as a tax grab and sticking plaster

Pension Freedoms reframed as a tax grab and sticking plaster

If someone had told me in April 2013 that by April 2015 people aged 55 or over could take all of their pension funds as cash, I would have said that they were mad. Many decades of history had cemented the status quo and providers had developed pension accumulation products that had only one outcome; an annuity purchase.

The nature of pensions before April 2015 was geared around the avoidance of investment risk by pensioners, where they bought an annuity from a provider, who paid out a steady income for as long as the pensioner remained alive, irrespective of the state of the investment markets. The pricing of annuities was based upon the long-term UK Gilt yield, which providers had to invest in, as the regulators insisted on a certain amount of asset backing for these long-term obligations.

Into what was a fairly stable position arrived a “perfect storm”; people were living longer, but retiring at the same age and the Gilt yield dropped dramatically, so there was much less income to pass to retirees. Ten years ago the 10 year Gilt yield was 4.95%, today the yield was 1%, ( To put that in context, 10 years ago, a typical annuity for a 65 year old man in good health was 6.8%; these days a good rate would be 4.75%, (

The Government found themselves in a bind; the very low Gilt rate had a great deal to do with government policy, keeping interest rates down and economic activity up. Keeping interest rates down made the general public feel better, feel richer and paying mortgages on overpriced houses. Doing nothing was not an option; the retired are more likely to vote than most. Giving a better deal to annuity purchasing retirees would be political suicide, so they needed an alternative and to frame it as a “good thing”.

“Income release” or drawdown has been available since 1995, but only as a “Capped” income, limited to what a government actuary considers as reasonable, given the Gilt rate and the likely life span of the retiree,( This was a sticking plaster on the falling annuity rate due to extended longevity. This was only expected to be taken up by the “more than averagely wealthy”, as it was expensive to set up, exposed to significant investment risk and only intended to last until the holder was 75 years old, (and then had to buy an annuity!)

Launched by the Finance Act of 2014, Pension Freedom was announced as the next “Good thing” as it gave retirees choices they had not enjoyed before. The Main Stream Media, (MSM), trumpeted all of the advantages without looking at the teeth of the gift horse.

The Treasury are keen on Pension Freedom for more than one reason;  it has been a massive tax grab, (, with receipts 50% over their own estimates and it has kept them away from the perils of pension reform, managing the economy with interest rates or regularising the Gilt rate.

As nothing is without consequences, what are the downsides of Pension Freedoms, both now and in the future?

  • It is an acceleration of tax receipts; later years will not benefit, so this government will benefit at the expense of a later one.

  • Potential investment losses

  • Potential fraud – pension fraud has been very lucrative for the dishonest

  • Longevity risk – running out of money in later life

  • Poor purchasing choices

  • Retirees running out of money will seek relief from the public purse

  • Significant undermining of the annuity market

  • More exposure to longevity risk

How this will play out in the next 10-20 years is open to speculation, but as the population is aging, less tax income soon and less guaranteed income in the future might reasonably be a problem.

For an individual about to retire, just drifting into it is no longer possible. Choices you make now will affect your life for years to come. Start thinking how you would like to receive your income and how happy you are at taking investment risk.

  1. Do you have debt to clear before retirement?

  2. Are you in regular contact with all of your pension schemes? Do they all have your current address? Do they have the correct beneficiaries?

  3. Do you know which are final salary schemes and which are money purchase?

  4. Think about your income needs in retirement. Do you need to take investment risk to generate enough income for your to live on it?

  5. Find an adviser – you will retire only once and the decisions need to be correct.

If you would like to know more about how we can help you plan and realise your financial goals then contact us at or call us on 01223 792 196.

The information contained is for guidance only and does not constitute financial advice. It is based on our understanding of UK legislation, whether proposed or in force, and market practice at the time of writing. Levels, bases and reliefs from taxation may be subject to change. Accordingly no responsibility can be assumed by Martin-Redman Partners its officers or employees, for any loss in connection with the content hereof and any such action or inaction.