A new inquiry into pension freedoms
Whilst I was travelling around the country talking about defined benefit transfer values (DB TVs), it was announced that the Work & Pensions Committee, under the Chairmanship of Frank Field, was to launch a new inquiry into pension freedoms – how the world has changed in the last two and a half years and whether there needs to be any further change.
Bearing in mind the pension freedoms were one of the biggest shake ups to pension legislation for many years, it is positive that action is being taken to keep it under review. This particular review was announced not long after the publication of the FCA’s Retirement Outcomes Review – the new enquiry could do a lot worse than to use some of those findings as a starting point. The findings can be summarised as follows:
- Accessing pots early has become ‘the new norm’
- Over half (53%) of pots accessed have been fully withdrawn
- 90% of these were smaller than £30,000 (60% were smaller than £10,000)
- 94% of consumers making full withdrawals had other sources of retirement income in addition to the state pension
- Income drawdown has become much more popular
- Many people want access to a lump sum and not income
- Is there a need for ‘guidance’ and guidance tools?
In the new review I would like to see some information on ‘motives’ i.e. not necessarily a look into where people are, but a greater focus on how and why they got there and what they intend to do next. Indeed, with one of the key issues being longevity risk, it will be a few years before we can see how much effect it has had in individual cases.
Within its remit will be issues such as:
- What people are doing with their retirement savings, how they chose their options and what assistance is/is not available to aid further decisions (information and guidance)
- Are there persistent gaps in the advice and guidance market – are automated advice and guidance working as expected?
- Do adequate products exist and are consumers encouraged to shop around?
- The pension dashboard – positives/negatives
- Pension Wise – positives/negatives. Figures suggested that of people aged 55 and over and planning to retire in the next two years, just 7% used Pension Wise.
- Pension scams
A few observations:
- I am not sure that shopping around is so relevant when it comes to income drawdown.
- Whilst there are pension scams, many scams will be when the money is out of the pension and in someone’s bank account, consequently we need joined-up thinking and strategy.
- The annuity market has lost a lot of capacity in the last two years and there are now approximately only half a dozen annuity companies in the open market.
- There has not been much alternative product development, although there has been talk of deferred annuities and default drawdown structures.
- Advice is great as these are complex decisions and mechanisms – ‘big’ guidance pointing to more advice might be the key. Highlighting the risks in drawdown and opening consumers up to investment knowledge could all help.
I have paraphrased some of the issues that will be considered by the enquiry but there is one I will leave in its original state:
“...are the freedom and choice reforms part of a coherent retirement saving strategy? To what extent is it complimentary to or undermined by other policies?”
I get a bit lost with talk of “a coherent retirement savings strategy”. The cynical might suggest that this was never a reason for pension freedoms but more of a tax take for the then Chancellor.
Issues with the pension freedoms and DB schemes, continual tinkering with the Lifetime Allowance, the Annual Allowance and tapering and changes to the Money Purchase Annual Allowance are a long way from a coherent ‘strategy’ at a time when the demographics demand that we need one.