Editor’s note: Three years on from the freedoms, advice is more important than ever

Thirty-six months is a short time in pensions. Before April 2015, few could have predicted that compulsory annuitisation would come to an end and the door to full withdrawals would be swung open.

As the pension freedoms reach their third birthday, it is worth weighing up the evidence to date. Let’s start with the good news: there aren’t fleets of Lamborghinis roaming the streets full of dishevelled pensioners who can’t afford to eat because of their gross exuberance. Instead of passively sitting in an annuity, savers in drawdown are suddenly a lot more engaged with what their provider and markets are doing.

It could have gone a lot worse. The reforms caught the entire industry off guard, which has led to wholesale changes in business models as annuity providers scramble to consolidate, and traditional life companies flog off their back books in search of higher returns in the asset management game.

The bad news is that many have only been prevented from taking their pot or buying an overly risky drawdown policy by their financial adviser. Still, not enough people are getting regulated advice. While Pension Wise and The Pensions Advisory Service continue to do an admirable job with guidance for retirees, they, and the Government, really do recognise there is a difference between what they are cut out to do and what needs the expert hand of a financial planner.

For what it’s worth, the FCA has done its absolute best to keep up with the tide. It has reviewed both advised and non-advised drawdown, closed book policies, default funds, defined benefit transfers and cash savings accounts and has collected a whole host of data to leave us better placed to judge consumer benefits and harm.

Many of the effects have been highly predictable: annuity sales down, drawdown sales up, plenty of people utilising their tax-free lump sums and then some. If you believe the ‘pension freedoms were specifically designed to increase tax revenue’ style arguments still floating around, then that was all part of the plan anyway. Or if you’re a big fan of personal financial freedom, that should not worry you at all.

But everyone should be concerned about the significant lack of shopping around and of seeking financial advice. More than half of all pension pots accessed since freedoms have been full cash withdrawals, but only around 35 per cent are getting advice on them. Half of those who took advice did not know their pension charges.

While advised clients are less likely to take out an annuity, they are also significantly less likely to withdraw all their cash at once. The pension freedoms may only be in their infancy, but the value of advice must be promoted to stop a tantrum later on.

Recommended

6

Hot Money: Assessing three years of pension freedoms

As the pension freedoms approach their third anniversary, advisers are reflecting on how the watershed policy has affected both their businesses and their clients. Clients have benefited from being able to access flexible drawdown and to use their pension to help fund inheritance. They are able to transfer out of defined benefit schemes and are […]

Annuity-Arrow-700x450.jpg
2

Fewer savers using advisers before cashing out pension

Fewer savers are turning to an adviser before fully cashing out their pension, latest FCA figures show. Between April and September 2017, just 32 per cent of full withdrawals were advised, down from 44 per cent the previous year. Nearly all (95 per cent) of the decline in advice was attributed to cash outs for […]

3

Pension cold-calling ban to start by June

A ban on pensions cold-calling will be put in place by June, following the tabling of new amendments to the Financial Guidance and Claims Bill. Ahead of the Commons report stage of the Bill on 12 March a “new clause 3” allows for the ban to start by the middle of the year. The Government […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

There is one comment at the moment, we would love to hear your opinion too.

  1. Christopher Pitt 22nd March 2018 at 3:50 pm

    A rather patronising article that presumes most consumers don’t know what they are doing. Most pension pots are worth less than £30k and so to spend north of £1,000 of that pot on financial advice is a much harder decision than for a pot of say, £300k. Also, a significant number of small pension pots are owned by people with other, much larger pension pots and / or DB schemes. So, to these types of clients, cashing in a small pension pot is not an action that warrants expensive financial advice.

Leave a comment