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 taking advantage of more holistic financial planning.

However, advisers disagree on how radical the freedoms have been and how their effect will ultimately be judged.

Some argue that any advantages are overstated because the majority of savers do not benefit from the freedoms because of the advice gap, while regulations on transfers and products are outdated.

Here, Money Marketing talks to advisers and pensions experts to get their thoughts on the impact the pension freedoms have had to date.

The story so far

Market data the FCA collected between April and September 2017 shows just 53 per cent of total annuity purchases, approximately 19,000 plans, were made by existing customers, a 7 per cent decrease on the same period last year.

However, the proportion of annuity sales made to new customers or in single and multi-firm third party arrangements saw a 7 per cent increase to 47 per cent.

Meanwhile, fewer savers are turning to an adviser before fully cashing out their pensions. 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 pots under £30,000. These figures relate to advisers benefiting from the freedoms, but have clients benefited from the same positive impact?

According to Aegon’s customer and consumer panel, they have. Results from a December survey show 72 per cent of the 874 adults polled believe the freedoms have helped people make the transition into retirement. Only a quarter of those surveyed said they would be in favour of increasing the age at which they can access their pension to beyond 55.

Positives and negatives

Red Circle director Darren Cooke says the freedoms have been positive in several ways.

He says: “The freedoms have encouraged more people to save into pensions as they feel more in control of their money. People talk about it being a tax-raising exercise for HM Revenue and Customs but I know people who have paid into a pension for the first time using carry-forward rules and those payments have been significant.

“Also drawdown is popular as people are more confident they are in control of their pot. In my experience, people have withdrawn for legitimate financial reasons and have not been irresponsible.”

Cooke adds: “Finally, there is the inheritance tax angle, with people funding inheritance through pensions, but that could change. Overall I am positive about the pension freedoms.”

What about concerns that the reforms have created new opportunities for scammers, particularly in the area of transfers?

Cooke says: “Some transfers have been done incorrectly, but what is surprising here is the FCA. It’s taking a long time to update the old rules on transfers. So there is a disconnect between the old set of rules and the new world.

“Scams existed before pension freedoms and one angle that has been taken away from scammers is pension liberation, because people know they can get money at 55. I am not aware of a pension liberation scam running at the moment.”

The pension freedoms in numbers


The proportion of full cash withdrawals for pension pots accessed between October 2016 and March 2017


The number of pots accessed for the first time in the initial six months of the freedoms from April to September 2015


The proportion of customers who used an adviser when going into drawdown between October 2015 to March 2017


The drop in annuity sales between October 2016 and March 2017, to the lowest level since the freedoms were introduced

Déjà vu

While Cooke is mostly upbeat, not all advisers are similarly positive. HC Wealth Management director John Abraham remembers the Pensions Review of 1994.

Then, the industry regulator, the Securities and Investment Board, ordered a review of sales of personal pension policies (both regular premium and transfer policies) taken out between 29 April 1988 and 30 June 1994.

Abraham says there are echoes of what happened then and at British Steel now: “I was working at a small firm where the turnover was £1m annually. We were asked by the regulator to review all our transfer work, and the administration of this cost £250,000. In the end the firm paid £40,000 in compensation for the transfer work done.

“Now the FCA is contacting all the firms involved in transfers. The misselling scandal then involved miners, and now we have steelworkers. Anyone who was around 25 years ago will have a red light going off in their heads.”

Abraham argues it would be wise to learn from history: “Many advisers have forgotten the lessons from the past, and were probably not involved in the original pension transfer review.

“People are being blinded by the transfer value, which is twice the value of the client’s house – which does not automatically mean transferring into a DC plan is a good idea.

“Also, we have been through an extended bull market, and this means people have forgotten that funds can take a hit from time to time.”

The future

Aegon pensions director Steven Cameron says things are not as bleak as Abraham makes out.

He says: “I can sympathise with anyone who has been through the pensions review as it would scar them for life, but the circumstances were different. The Government encouraged people to leave final salary schemes and it happened to people who could still accrue future benefits.

“Also, there was not the level of regulation and professionalism advisers have now.”

Cameron adds: “It appears there have been isolated instances of poor practice, but that should not be generalised.

“We need to have the confidence to draw the line under any recent poor practice and move forward with the support of the media, politicians and regulators.”

Cameron is interested to see how advisers develop propositions that appeal to clients they have not served before.

He adds: “One of the things I’m intrigued by is if we see investors who entered drawdown without advice might now seek advice to ensure they don’t run out of money. Is there an opportunity for specific advice in this area?”

Hymans Robertson head of research Stephen Birch at expects increasing competition from different players in the adviser market.

He says: “One challenge that has emerged is the advice gap for people with pot sizes ranging from £50,000 to £500,000.

“Here we might see Nutmeg-like start-ups that create solutions for pensions instead of Isas, and focus on retirement planning rather than an investment solution.”

Birch adds: “Start-ups will create non-advised robo solutions or digital answers, and these will compete with more established solutions from the workplace and life insurance firms.”

Adviser views

Will MowattMowatt Financial Planning director William Mowatt

The big changes resulting from the freedoms are transfers and flexible drawdown. People use drawdown to meet their immediate cash needs tax efficiently. It is useful to everyone and therefore it is no surprise drawdown is popular. Transfers are positive as people can take control of their money.

The British Steel stories are not encouraging but hopefully that is not widespread, so I am not overly concerned about this area at the moment. However advisers do have to ensure the advice here is spot on.

An unexpected benefit of the freedoms is that pensions can be used for the purposes of inheritance planning. Another development is holistic financial planning of all assets, which is more prevalent as pension freedoms push advisers to consider things in the round.

If clients can access their pensions in a way they could not do before, then it changes the way they think about their assets.

Alistair-Cunningham-700.jpgWingate Financial Planning director Alistair Cunningham

Pension freedoms introduced the ability to access funds when you want, as long as you pay relevant tax. Death benefits are the main improvement.

But there are some important caveats.

The whole point of pre-2015 withdrawal rules was to ensure people did not run out of money. Why is it now desirable for a client to be advised to take out more than they can withdraw sustainably?

On transfers, far too many have been done under the guise of pension freedoms when nothing has fundamentally changed. So pension freedoms is just a smokescreen for product innovation that does not necessarily benefit the consumer.

There are some parts of the reform, like the tapered annual allowance, that are hideously over-complicated. 

In some cases we cannot give advice because of the complexity, and it seems the rules have been designed to catch people out.

Head to head: To transfer or not to transfer? 

Tapper-Henry-First Actuarial-2013
Henry Tapper

Against transferring

Of course, it’s not always wrong to transfer – but this is why it usually is.

Most people undervalue a pension and its guarantees. On average, people underestimate how long they will live by seven years, they underestimate the value of inflation proofing from statutory pension increases and they undervalue their spouse’s pensions.

Most people overvalue freedom from pensions and will find managing the drawdown of their assets “the hardest, nastiest job in finance”. Too often I’ve seen people either hoarding their retirement wealth or overspending it.

A defined benefit pension has been proven as right for most people most of the time. It is rightly considered the default strategy for people lucky enough to have rights to one. Transferring away from its security is for most people foolhardy and a decision they will live to regret.

I say this with conviction, because I am a pensioner in receipt of  a DB pension and chose not to take my attractive transfer value.

In fact I chose not to take my tax-free cash either. That’s because I like the security of a monthly inflation-protected wage for life and it makes me very happy.

Henry Tapper is First Actuarial business development director

Kim North greyKim North

For transferring

On the introduction of pension freedoms I was disappointed that those in defined contribution pensions were given flexibility while DB scheme members are treated as if they cannot be trusted.

I calculate that around 30 per cent of DB scheme members, mainly those who cannot bear investment risk and have no interest in managing money, should stay in and take the lifetime annuity on an indexed and joint life basis (if appropriate).

Up to 70 per cent of DB members should consider the benefits of a transfer to DC to benefit from the investment growth potential, the taxation benefits, the variations of drawdown amount whenever required and, most importantly, the death benefits.

I talk regularly to clients aged over 55 who want to leave their hard-earned pension to their children and grandchildren. This is the font of all financial planning: to pass wealth down the generations in a tax- efficient manner. DB schemes in payment do not allow proper generational planning to happen.

Today’s problems with DB schemes include insufficient employer covenants, cautious DB investments with little growth, inadequate funding levels and poor communications from trustees.

A solution for many is partial DB transfers, so let’s hope all schemes can offer that. Many do not, as administration systems creak under the strain of transfer requests and use old technology. Surely freedom of choice for all pensioners is the right answer?

Kim North is Technology and Technical managing director



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There are 6 comments at the moment, we would love to hear your opinion too.

  1. Oh yes, there has been plenty of assessing.

    HMRC have assessed and rubbed their hands with glee on the extra and early tax trawl.

    Advisers have assessed and rubbed their hands with glee – no more just one off charge for an annuity, but an ongoing income stream.

    As have the fund managers, the providers and the platforms.

    Pension freedoms have been a real boon for the Revenue and the industry, but in spite of all the hype one may wonder how in fact it has been really good for the poor old punter.

  2. I find it ironic that Henry Tapper is using his personal experience and his personal views as evidence that DB is right for most people. Maybe that’s why he is an actuary, not an adviser.

    The only way anyone can understand which option is best for them is through individually tailored good quality advice/information.

    Deciding your retirement strategy and which is the best option/options for you, is the single biggest financial decision that most people will ever make.

    Would you expect to massive medical decisions without taking advice from experts? Of course not and retirement planning for most people is no different.

    People either tend to be too pessimistic (like Henry and the FCA) or too optimistic. What is actually needed is a realistic viewpoint/advice, that takes into account what if’s?

    Personally I would suggest that the solution that best suits most people is a mixture of some guaranteed benefits, coupled with some flexibility, however where that “balance” occurs, depends entirely on that specific clients circumstances, objectives, goals and attitudes.

    Very few people are best suited by either total guarantee’s and no flexibility, or total flexibility with no guarantee’s, that’s like saying most people are risk 1 or 10 for ATR.

    Reality suggests that the middle ground a balanced approach is likely to be where most people should likely sit, however unfortunately in many cases this option seems to get ignored for an all or nothing approach.

  3. Robert Milligan 22nd March 2018 at 1:51 pm

    No one Cares if I sell my home, move into rented and squander the money, no one cares if I squander my savings, sell my car, and now live simply on my state pension, but Hey if I use my “Pension ” the Product Providers, the Regulator and the papers think I am stupid!! A Pension is simply a Tax Wrapper, If I feel I want an option other than a Guaranteed Income, which disappears from my estate upon my death, then shut up and let me decide what’s best for me

  4. Darren Cooke is right to identify the scandal of the Mineworkers in the previous Pensions Review, but I fear not for the right reasons.
    I believe an objective review of many of those transfers would reveal that they were right to transfer out. This is for the simple reason that having received back all that lovely compensation from the industry after the review, Government since 1994 has received well over £4Billion in surpluses as part of an agreement reached on privatisation in 1994, and expects to receive billions more in the future. This is no small part due to the vastly reduced life expectancy experienced by many miners (who’d have thought that?!)

  5. I was around when the Mineworkers pension were being transferred out on mass and saw the efefcts of the Pension Review, living in Deal at the time with it’s mines at Tilmanstone and Betteshanger. I also saw loads of seamen transferring out too.
    I was not personally involved.
    There are arguments for and against transfers BUT i agree that the default starting point should be the remain inb a DB scheme unless evidence is there to the contrary.
    What I believe however is that in many cases, the freedoms a member needs are limited and there wants are only for a small proportion of the overall CETV.
    The solution for my mind would be for MANDATORY changes tos cheme rules to allow PCLS to be drawn seperatly to the income stream and at different times.
    Going further a voluntary scheme where trustees can establish a regime with partial transfers so that a secure income can be maintained at a level appropriate to essential needs and the balance transferred out.
    Look at a pyramid like Maslow’s hierachy of need and make sure the lower levels are supporte by the DB scheme remaining and the upper levels by partial transfer.
    I know it would be adminstratively more costly, but it would reduce both the number of inappropriate transfers as well as advice fees as most (especially SJP) seem to take a contingent transfer charge based on the size of the transfer rather than the work involved.

  6. Andrew Macintyre 26th March 2018 at 9:42 am

    No doubt that many have and will benefit from the increased flexibility. But for many it will be a disaster. Its all been plain sailing when markets have been benign, but as soon as big falls in markets come along the problems will emerge.

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