Pensions Freedoms: 5 years on from the 2014 Budget announcement
In the 5 years since George Osborne announced he would be changing the pensions rules to what are known as the Pensions Freedoms, the pensions landscape has dramatically changed. Here we look at transfers facts and figures and where we the market might go from here...
Five years ago, the then Chancellor of the Exchequer George Osborne announced the Pension Freedoms in his March 2014 Budget, pronouncing that no-one need buy an annuity again and in the same breath, and practically overnight, the falling away of the annuities market.
So, in the five years, who has won out from the Pensions Freedoms at the annuity market’s expense?
The Origo Transfer Service operates to effect and help improve the transfer process of monies and assets between financial companies. With over 120 brands using the service, it deals with the majority of transfers in the market. Since launch in 2008, the service has completed 3.6million transfers, including personal pensions, occupational pensions, ISAs and GIAs. This means the Origo Transfer data can be seen as an accurate reflection of market trends.
One clear trend is the volume of transfers in comparison to pre-Freedom years. Since the original announcement in 2014, pension transfer volumes through the service have increased 64%, reflecting the surge in interest in moving money into pension arrangements that let individuals take advantage of the Freedoms. This includes transfers from defined benefit schemes into personal pensions and also, between older policies to more flexible personal pensions.
However, the biggest winner from the rules changes as demonstrated by our transfer stats has most definitely been the SIPP providers. The desire for people to keep hold of their investments has seen large numbers move into SIPPs, thereby allowing them to keep their money invested, manage their investments, draw down under the new rules, yet stay within a pension arrangement.
As a result, our Transfer Service has seen an influx of more specialist SIPP providers in recent years, looking for the best means to carry out efficient, cost effective switches for pension holders. Currently, there are 51 companies providing SIPPs now signed up to the Origo Transfer Service.
As an indication of just how much SIPPs have benefited, transfers into SIPPs have increased 74% since the Freedoms were announced. In the very first year after the Freedoms became law, i.e. April 2015 - March 16, SIPP transfer volumes increased 116%.
Our figures show that SIPPs and Income Drawdown transfers have accounted for over half (53%) of all transfers through the service since freedoms were announced, whereas in the tax year 2013/14, prior to announcement, SIPP transfers in constituted just 29% of total transfers.
The average pot size transferred through our Transfer Service in the last five years has been £52,626. For the SIPP/Drawdown market it is higher, at £64,782.
What’s happened to annuities?
The much talked about death of the annuity market did not occur. Indeed, as might be expected there is still a strong case for products that provide a guaranteed income for life and do not require the management of investments, which are subject to market risk.
Of late, hybrid arrangements have also become more popular, which see guaranteed income products blended with invested products to suit an individual’s circumstances.
While dropping dramatically in terms of volumes in the period between March 2014 and April 2015 (when the Freedoms became law), annuity transfer volumes have remained steady over the last four years, accounting for around 6% of all transfers into the Service. In the tax year 2013/14, prior to freedoms announcement, annuity transfers accounted for 14% of transfers. Overall, in terms of total transfers through the service in the 5 years, annuity transfers have declined by 22% since April 2014.
The average pension pot size transferred into annuities over the past five years is £45,760.
The future: Where transfers automation can help
The Origo Transfer Service has been responsible for creating the standards and automation that has helped cut the time for defined contribution (DC) pensions transfers from an average of 50 working days to a longstanding average of 11.6 calendar days.
Much of the DC market is now covered but occupational transfers (DB) is a key area where automation of processes will greatly impact not only the efficiencies and costs of pension schemes and third party administrators but also improve the end experience for scheme members.
Since the Pensions Freedoms were announced occupational transfers through the Origo service have increased 400%. In the last tax year, 15% of total transfers were occupational, a jump from 5% in 2014-15 tax year. To date, the average pot size for these transfers has been smaller, at £25,942.
The benefits of automation can also be gained for bulk transfers. The Origo Bulk Transfer Service is enabling faster, more transparent and secure switching between ceding and receiving parties, by for example removing the reliance on paperwork, different and varying spreadsheets and the potential risks of keying errors, whilst also saving considerable time and resource commitment.
The pension landscape is now very much different from that of 2014. We have the ongoing impact of Freedoms as more people reach the age of 55 and look to switch their pension arrangements. Auto-enrolment means more employers are reviewing and switching their schemes and the same applies to employees. All of these recent changes require, from the industry, a means to effectively and efficiently undertake individual and bulk transfers for each and every party involved. And in all of these areas, our Transfer Service has it covered.