I was most interested, if a little surprised, to read in a recent report from the public accounts committee that it sees pension freedoms as a potential trigger for mass financial misselling.
Some misselling – ok, perhaps relatively speaking, quite a lot – probably. Many people getting it wrong and drawing too much or too little from their pensions? Certainly. And the Treasury surreptitiously doubling or even trebling its tax take? Undoubtedly. But mass financial misselling? That sounds very alarmist and takes the problem to quite another level, which, if it were true, should mean a dramatic curtailment and/or rowing back on the entire policy forthwith.
I doubt very much the Government would want to go down that road; certainly not at this relatively early stage. That said, there is no room for complacency about the risks inherent in a major policy switch that was sprung on the industry at very short notice and with little time to prepare.
Most of us thought the introduction of pension freedoms was generally a good thing from a consumer perspective but there is no doubt it substantially complicated the whole decumulation process and exposed individuals to pitfalls that did not exist previously. Clearly, much more has to be done to ensure consumers have a better understanding of the products they are purchasing and, in many instances, the risks involved.
Common misconceptions include the notion a pension pot can be used for withdrawals like a bank account or for the purchase of a buy-to-let property without making clear the tax consequences in either situation. The freedoms have also resulted – indirectly, at least – in an increase in pension frauds and other scams, exposing new retirees to the risk of being conned out of their hard-earned savings.
“I am afraid, for many, annuities are now something of a tarnished brand, seen as being of poor value and inflexible”
The Government is looking to reorganise the Pension Wise service to make it more effective in terms of delivering better guidance to consumers. However, that is not enough. There needs to be a concerted effort from across the industry to improve understanding and encourage the taking of regulated financial advice wherever and whenever it is appropriate to do so – which may be more often than most currently seem to think.
The so-called second line of defence also needs to be beefed up, while the language of pensions has to be sorted out and made much more consumer-friendly too. It goes without saying ridiculous expressions such as uncrystallised fund pension lump sum must be cast aside without further delay.
And should we not be making more of an effort to try to restore the image and reputation of annuities? Despite the alleged popularity of the freedoms I cannot help but feel the majority of new retirees just want a regular, secure, guaranteed income throughout their retirement, which is exactly what an annuity will give them. But I am afraid, for many, annuities are now something of a tarnished brand, seen as being of poor value and inflexible.
There are new products on the market but these are yet to fully make their mark. Hopefully, in the fullness of time, they can develop into something that gains wider recognition. Indeed, there is still an awful long way to go before annuities become the natural end product of a defined contribution savings plan once again – if ever.
So where might we be in five or 10 years’ time? Will the trigger the public accounts committee fears be pulled and kill the policy stone dead, as it appears to have done in Australia? Or can pension freedoms, as a concept at least, be built upon and, alongside a more vibrant annuity market, be made to work better for the benefit of all? We shall no doubt find out in the light of hard experience in due course.
Malcolm McLean is senior consultant at Barnett Waddingham