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Managing my money for young adults
Managing my money for young adults

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11 Recent pension reforms in the UK

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Figure 8
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This image shows a cake with candles in the shape of 68. Candles in the shape of 65 have been taken off the cake.

Figure 8

In recent years there have been extensive changes to state, occupational and personal pensions. These reforms have been driven by the following factors.

  • The need to make pensions affordable given growing longevity. This has led to the state pension age rising, and to occupational and personal pensions becoming less generous.
  • The desire to give people greater flexibility in how they can access and use their pension savings.
  • The need to reduce the cost to the government of the tax incentives relating to pensions given size of the government’s budget deficit.

From 2015, those retiring or approaching retirement are no longer faced with the option of just buying an annuity based on the value of their pension pot. The funds in the pot can be accessed – 25% of them tax free – and the money used freely. Some people will doubtless take the opportunity to spend the money that is realised. The likelihood is that most of those who do access their pension funds in this way will invest the money in alternative ways of providing an income in retirement – perhaps by investing in buy-to-let property.

Future decades will inevitably see more changes. It is essential as you move through your working life that you monitor these and track what they mean to you in terms of when you can afford to retire and the income you have in retirement.

Activity 6  Risks of opening the pension pot

Timing: Allow about 5 minutes

Can you think of any risks for pensioners from the recent reforms that give them more flexible access to the money in their pension pots?

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Feedback

There are several risks that those approaching retirement are exposed to as a result of the reforms.

  • They could use up their pension pots too quickly and end up being poor in later life.
  • They could invest their pots in risky projects that fail to generate the income needed in retirement.
  • They could become the victims of scams, with fraudsters targeting the money in their pension pots. Sadly there is evidence that many pensioners have already lost money through such scams.