- FCA concerns about ‘significant risks of harm’ from pension freedoms are valid, but do not mean freedoms are wrong.
- Consumers are facing new risks, but it is right to allow people to manage their pensions over time, rather than requiring most to just buy a standard annuity.
- Original policy intention of ensuring everyone receives impartial guidance or advice before taking money from their pension was absolutely right, but this is not happening in practice.
- Without impartial guidance or advice, consumers are at the mercy of providers and scammers, without the necessary information or experience to make good decisions.
- The more people who receive PensionWise guidance the better,
to help avoid scams and make better use of hard-earned pension savings, rather than just calling provider helplines.
It is certainly true that there are significant risks for consumers as a result of the new pension freedoms. But this does not mean that the policy itself is wrong. The problem lies more with the way the market has developed, the difficulties faced by consumers in understanding how pensions work, the complexity of past products and the lack of financial education among the population.
It should not be forgotten that there were serious risks for consumers under the old regime too.
The original intention was that people would receive free, impartial guidance to help them with their pension decisions: The Government was absolutely right to trust people to make their own decisions about what is best for them and decide what they want to do with their pension funds. But a major problem is that so many people are being left to deal with the new freedoms without any financial guidance or advice. The Government’s original intention was also to ensure that everyone would receive free, impartial, expert guidance before they made their decisions – and ideally would receive independent, impartial financial advice.
The Government went to enormous lengths to establish the PensionWise guidance service: PensionWise has done an excellent job for those who have used it. It has helped them understand the risks and important issues they need to consider before making irreversible pension decisions. Those who use the PensionWise service will make better-informed decisions and have a chance to understand the implications of taking money out too soon, how much tax they may pay, the importance of long-term planning and the complexity of pensions. They may then realise why they might want to use an independent adviser to help them through the complex choices.
PensionWise has saved many people from losing money to fraudsters: People who have an appointment with a PensionWise guider will be more likely to avoid falling for scams. If they are about to transfer their pension as a result of a cold-call, then PensionWise can warn them about such criminals. Sadly, take up of PensionWise has been woefully low, around 90% of people are not receiving any help.
The Government also introduced a new £500 ‘advice allowance’ to encourage more consumers to use an IFA: For the first time, the pension freedoms have resulted in official recognition of the importance of using an Independent Financial Adviser and the value of paying for independent, expert financial advice. It introduced the ability for people to take £500 out of their pensions to pay an adviser to help them making important pension decisions. Unfortunately, take-up of this allowance has also been almost non-existent, with most people unaware of it and pension schemes failing to promote it – or in some cases not permitting it at all.
The vast majority of people are making pension decisions on their own: This was not the intention of the original policy and clearly increases risks to consumers. The lack of guidance or advice has caused many to make poor choices or even to lose their entire pension. Pension providers clearly have unfair advantages over their customers, due to the complexity of pensions and the asymmetry of both understanding and experience.
Consumers are too often relying on their pension provider helpline which is not impartial: Many customers are making decisions to take money from their pension without realising the consequences, or are just using their pension provider’s helpline to buy whatever products they can offer. Taking cash from their fund when they are in their late 50s or early 60s, without realising they will lose 40% or 45% of this in tax, is not a sensible strategy unless the money is put to better use. Most people will be better advised to preserve their pension money for their 80s and beyond.
People need help to understand the tax benefits of keeping pensions longer: To make the system work better for individuals, we need to ensure more people (ideally everyone considering taking money out of their pension) use the free PensionWise guidance service, and as many as possible have the help of expert, reputable, independent advisers. The tax advantages of pensions are significant and many people are withdrawing funds from pensions and paying much of the money in tax, rather than leaving their fund untouched. Even if the market falls 30%, if withdrawals are taxed at 40% or 45%, then the consumer could still be better off leaving the money in their pension for later life.
Most people who are still working should keep the money in their pension fund: Those who have not yet retired are unlikely to need to cash in their pension fund. If they are still in their 60s, they should have a 20 or 30 year time horizon and taking the money out means losing the tax benefits of pensions (the income and growth are tax free and any money passed on at death is tax-free too). Leaving the pension gives time for the fund to grow in future. Pensions are meant to support you when you no longer work, rather than provide spending money in your 50s and 60s. These are the important messages that financial guidance can help with.
New approaches could include considering pension in four parts – for your 60s, 70s, 80s, 90s: Pension providers have not really developed exciting new products or approaches to replace the old choice between just a standard annuity, or drawdown. Nowadays, fewer people are buying annuities, but the alternative is usually just a drawdown fund, which charges higher fees than pensions. There are some basic new ideas that could be developed to help people manage their pensions through their retirement. For example, if people’s pension funds are divided into four parts, then those who are reaching their 60s could have one quarter allocated for the short term (if needed), one quarter for spending when they reach their 70s, another quarter invested for their 80s and a quarter designed to spend in their 90s. Over time, these funds can be revisited and, if someone is still working, they may not need the first 25%, so could keep that to supplement spending in the years when they are retired.
Freedom is much better than the old system but consumers need help to make good choices: The pension freedoms were a golden opportunity to help people achieve much better outcomes than under the old system. In my view, it was wrong to force almost everyone to buy an irreversible product which might not be suitable for them, which they did not understand, which had become poorer and poorer value and which often made no provision for a partner, or for those in poor health. Trusting people with their own money makes good sense, as long as they understand the choices facing them and are not just at the mercy of providers. The asymmetry of information and experience creates risks, which is why we need to encourage more use of guidance and advice as quickly as possible. Let’s not abandon the freedoms, let’s make their work better.