Pensions - Articles - Fixing the Freedoms


A new paper published shows that the low take up of advice and guidance provision is failing to meet either the expectations or needs of consumers, and that as a result many ordinary older people are making risky decisions they may subsequently come to regret.

 ‘Fixing the Freedoms’ – written by Dominic Lindley, an independent consumer consultant – was commissioned by Age UK to investigate the development of retirement income products, customer support, and industry thinking since the pension freedoms came into effect in 2015. The paper is the result of a series of interviews with specialists from across the pensions industry.

 A lack of innovation since the introduction of the pension freedoms four years ago is forcing many older savers into making complex pensions decisions without advice or support, or without appropriate products to choose from, according to the paper.

 Age UK is warning that the potential for – and consequences of – customers getting it wrong are huge. Many older people are unaware of the need to factor in elements such as upcoming tax bills and state benefit rules, and the Charity is concerned that getting to grips with the new flexibilities is an extremely challenging prospect for the majority of savers who have never previously thought much about their pension.

 The Charity is also worried that limited innovation aimed at consumers with small to medium-sized pension pots in particular has left many lacking access to good-value and appropriate products, and without the tools to help them manage their money effectively. This despite one of the main aims of the pension freedoms being to allow pension providers much greater freedom to innovate and create products and processes which better met the evolving needs of consumers. Empowering consumers to make their own choices was, at the time, predicted to stimulate innovation and competition in the market. However, this appears to be taking a lot longer, and to be happening to a more limited degree, than the champions of the pension flexibilities had hoped.

 In addition, many of the experts who were interviewed for this project expressed concern that some sort of scandal related to pension freedoms may well emerge over the next few years – most likely as a result of a market downturn or a sustained period of poor returns, causing many older people who have not understood the risks of their drawdown fund or who are holding inappropriate investments because of inadequate advice to suffer losses. Figures from the Financial Conduct Authority (FCA) show that over 90,000 consumers run the risk of running out of money in a market downturn unless they cut the amount they are taking out

 The Charity is calling for urgent and decisive action from the sector to implement the following key recommendations, aimed at ensuring ordinary older people with modest amounts of pension wealth to draw on get a better deal from the pension freedoms:

 Consumers cashing in their pension
 - Clearer warnings on tax payments and a chance to think again on withdrawals

 - Better rates on cash deposits

 More suitable products
 - Enable NEST to offer retirement income products

 - Charge cap for income drawdown pensions

 - Better investment pathways and stronger governance

 - Help consumers in drawdown use their savings wisely

 - A better annuity market

 Helping consumers get the most from freedom and choice
 - Comprehensive Pensions Dashboards

 - Default guidance with an independent opt-out process

 - Clearer warnings about impact on state entitlements

 - Provide extra help and support to vulnerable customers

 - Protect pension guarantees

 - Stronger action to end inappropriate Defined Benefit transfers

 Caroline Abrahams, Charity Director at Age UK, said: “The Pension Freedoms introduced in 2015 have been really popular to date and there’s no doubt that many are enjoying and benefitting from the greater flexibility they’ve been given. However, we are worried that a lot of older people with small and medium-sized pension pots, who do not pretend to be particularly financially savvy, are making risky decisions that could leave them in a mess in a few years’ time, especially if there’s a downturn in the market as is bound to happen at some point.

 “Without decisive action the level of detriment will only increase as more consumers reach retirement. Engaging and empowering consumers by providing them with information and encouraging them to take up guidance is important, but not enough on its own. As a minimum, we need to get more people to use the Pension Wise service, which has proven popular but with far too few savers using it. The Government and the FCA need to take a far more proactive approach to ensuring that these consumers get a good deal so that if and when a market storm hits, it does not destroy public trust in pensions and the reasonable aspirations of thousands of consumers for a comfortable retirement.

 “The onus is on the Government to make it easier for people with modest amounts of pension wealth to take smart decisions that really will benefit them into the longer term, not just today, through increased use of default options.”

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