One of the biggest issues with pension freedoms is that pensions are now perceived as being simple and easy to access without financial advice. Nothing could be further from the truth.
The Government’s reference to pensions being used as bank accounts hides the truth that we are still dealing with the same issues as before the freedoms; even those that were around before pensions simplification (which passed most of the world by).
Further changes this year have brought additional layers of complexity, even for advisers, with the money purchase annual allowance, the reduction in the lifetime allowance, associated protections and the tapered annual allowance all very client specific.
A lack of understanding is evidenced by recent research from Citizens Advice, which found seven in 10 people that have accessed their pension since the freedoms were introduced did not shop around for different products.
The pressure from the Government and the media for all providers to offer the freedoms so members do not have to move could have led to some of this. While remaining in their current product may not be the wrong thing for these savers, it is not possible to say either way without considering all the options.
Advisers are key to savers having a good retirement because it is difficult for most consumers to understand the implications of their choices when accessing their pension pots. These implications can range from locking themselves into a flat rate of income for the rest of their life, to risking everything by taking too much too soon.
Early exits and transfers
Early exit penalties seem to play less of a role in the decisions of those accessing their pensions through their existing provider, with the research finding only 15 per cent of those that did not shop around citing it as the reason.
This is a surprise, although it depends on what type of pension scheme and when it was taken out as to how big or small these penalties will be. What would be more interesting would be to know how many people not directly accessing their pensions have remained with their current provider because of transfer penalties not related age.
I am not saying a transfer is appropriate for all but for those locked into a poor performing or poorly administered scheme it may be the difference between a good and a bad pensions experience. Advisers have the experience to know if there are benefits that can be improved on transfer, such as increased death benefit options. They will also be aware if there would be a loss of benefits if a transfer were to happen and the ways around this.
The research also shows those that purchased annuities shopped around more than those that took drawdown, which again evidences a potential lack of understanding.
An annuity is something that can be easily compared, with online tools and an annual or monthly monetary amount people can visualise. Drawdown, on the other hand, is not as simple. It is not a single transaction with a single outcome; there are many variables that may just make those wishing to use it take the easy option, even if it is not the most appropriate for their circumstances.
Advisers can help individuals understand the issues with drawdown, including potential ongoing variable charges and the need to continue to monitor and choose investments that mirror their requirements and risk profile. Providers that have been forced by public demand to offer drawdown or uncrystallised funds pensions lump sums may still not be offering the most suitable options for their members. After all, it is virtually impossible to cater for everyone.
Forced to take advice?
There are clearly circumstances where the Government sees increased risk with the pension freedoms but apathy does not seem to be one of them. I do not think you can force someone to take advice but encouraging them to get more information from their existing provider and giving details of what they could be missing out on could bring about better outcomes for those taking benefits now. These are the people upon who the historical complexities that we as an industry understand, but of which they will probably be blissfully unaware, will impact the most.
Claire Trott is head of pensions technical at Talbot and Muir