Ten years on from the ‘pension freedoms’ revolution, how have things worked out?
In 2015, I warmly welcome the reforms. They seemed to offer exciting opportunities to radically rethink how people use their defined contribution (DC) pension funds.
I still believe they were a brilliant idea, but sadly haven’t maximised the benefits of the new landscape.
The intention was to give people flexibility to make better use of their pension funds to best suit their own circumstance.
They could choose whether, when and how to annuitise, or whether it was best for them to keep their money invested.
Abolishing the 55% death tax on unused income drawdown funds was also an inspired policy decision, at last ensuring sensible behavioural nudges to encourage keeping funds invested, without fear of dying sooner than expected and losing most of their pension.
These new freedoms did improve outcomes for many, with people benefiting from cashing-in or keeping their smaller pension funds, rather than buying nugatory annuity income, especially under £10,000.
Others profited from investing in equities for longer, or phased their withdrawals, combining pension and ISA to manage tax liabilities.
But this has been nowhere near the revolution that seemed possible. With very little modernisation of products or thinking to help customers make the most of their freedoms, the great opportunities for customers and providers have not really materialised.
Sadly, PensionWise was never properly promoted, so take-up has been tiny
Retirement income decisions are not straightforward and most people need help – or ideally advice – to make the best choices.
Therefore, the announcement of free, unbiased, nation-wide PensionWise guidance, information and explanations, to accompany the new regime, was very important too.
Sadly, PensionWise was never properly promoted, so take-up has been tiny. Done properly, this independent guidance could have helped people understand why they might need paid-for professional advice. But with such low take-up, this simply didn’t happen.
There have been small steps to strengthen PensionWise nudges, but much more is needed to improve member outcomes.
Partly due to the problems of over-inflated defined benefit transfer values resulting from ultra-low bond yields, combined with DC freedoms, independent financial advice has become increasingly onerous and expensive to provide, locking out most pensionholders.
Pensions freedoms, 10 years on
Those trying to manage by themselves, have often triggered avoidable tax bills, kept money in cash, or bought unsuitable, expensive drawdown products, rather than reaping intended benefits.
Where are the new default options, for accumulation or decumulation? Pensions remain stuck in the past.
Most DC pension schemes still put people into lifestyle or target-date funds, which don’t suit modern lifestyles and may target the wrong date.
No questions are asked about intended retirement date, health, other pensions, or whether the funds might stay invested, rather than being withdrawn.
At-retirement options also remain fundamentally as before – choosing annuity or some kind of drawdown. No new default products to keep money untouched, or perhaps pay-out, say, 4% of the fund as yearly income, unless instructed otherwise.
Too often, those with several pensions, who may do best leaving some for later life, do not realise the risks of giving-up smaller pots, or benefits of leaving them alone and just drawing any DB pensions, rather than amalgamating everything.
We can’t wait 10 more years to get this in place
The pensions industry initially claimed it had not been given enough time to prepare for the freedoms, but ten years on they still seem unprepared. Providers have generally failed to educate, engage and innovate to capture customer enthusiasm.
As DC assets seem set for fast growth in coming years, new default products, more guidance and ideally more professional advice are important. We can’t wait 10 more years to get this in place.
However, I also worry that the opportunities offered by pension freedoms may disappear, before they have even delivered the benefits they could and should have provided.
In particular, the imposition of inheritance and income tax on unused funds will destroy the behavioural incentives to keep money for much later life.
Such sudden retrospective taxation, throwing carefully-made retirement income plans into disarray, undermine the case for advisers and individuals to undertake long-term retirement planning in future and incentivise earlier withdrawals.
It will be a travesty if pension freedoms disappear before delivering their real benefits.
I hope the government will reconsider its plans and the pensions industry will wake up to the dangers ahead before it’s too late.
Ros Altmann was pensions minister 2015-16 and is a member of the House of Lords
