Andrew Tully: Shopping around must be focus of pension reform


Over the last few weeks, we have seen an increasing focus on how providers are coping with the pension freedom changes, specifically questioning whether people can get access to their pension without paying excessive charges.

But while Government ministers and the FCA work to ensure people have the ability to cash in their pension pots as and when they want, a more significant issue appears to be passing beneath the radar: are customers getting good outcomes?

Now, I am not suggesting that cashing in your pension pot is necessarily a bad idea. For some people, in some situations, it is the right thing to do. And so it is entirely reasonable that these people should be able to get access to their money quickly and relatively cheaply.

However, despite the attention-grabbing headlines, many people still want to turn at least some of their savings into a retirement income by using drawdown or an annuity. It is crucial we make sure these people also get the right solution but, worryingly, pension freedom has made little difference to the quality of their outcomes. In fact, it could be argued many are now worse off.

In the first quarter of 2014 (the last quarter before George Osborne announced the pension freedom changes) 47 per cent of retirees bought an annuity from the provider they had saved with. In other words, they did not shop around. That was a scandalously high figure, which the government and regulators should have been doing far more to change.

If we fast-forward to the first quarter of this year, the proportion of people buying an internal annuity has soared to 61 per cent. A significantly larger share of annuitants are now locking themselves into poorer deals without shopping around.

We know people who do not shop around lose thousands of pounds over the course of their retirement. They are very unlikely to have received the highest possible income available in the market and few “internal” annuities take health and lifestyle into account, which further increases the loss people face.

It is more difficult to illustrate the difference in customer outcomes with drawdown as there are so many influencing parts (charges, service, fund choice etc.) but, again, we know significantly more than 40 per cent of customers stay with their holding provider.

There may be good reasons for doing this but it is still important people shop around so they understand how the drawdown product they are tempted to choose compares to other options in the market. This is not straightforward and is where professional advice can add great value.

From a political and regulatory perspective it is crucial we consider the wider customer outcomes, not just narrowly focus on those choosing to cash in their pension. The FCA recently issued a market update as a result of the pension freedoms. Not surprisingly it found a significant increase in activity since April.

While the majority of consumers have been able to take advantage of the new flexibilities, and most firms have coped well with this additional demand, there have been some operational challenges at a minority of firms.

As a result the FCA has sent all pension and retirement income providers a request seeking information on a number of issues, including the options they offer customers, their advice requirements and treatment of insistent customers, plus information on transfer procedures and any exit penalties imposed.

Given the recent changes, obtaining all of this data makes perfect sense. But there is little there which suggests improving the numbers of people shopping around for the best solution is high on the agenda. To me, it should be front and centre.

Yes, it is far from an easy task: if we struggled to get people to shop around when most bought an annuity, getting them to do so when there are much wider and more varied options is downright difficult. However, if pension freedom is genuinely about helping more people make the best use of their savings, then only shopping around (and getting advice or, at least, help from Pension Wise) will help them get the best outcome, whichever option they choose.

Andrew Tully is pensions technical director at Retirement Advantage