Are pensions the new magic money tree? For many thousands of people aged at least 55 with a defined contribution pension, the answer seems to be yes.
For all of us who believe the purpose of a pension is to provide a sustainable income in retirement, the findings of the FCA’s Retirement Outcomes Review interim report make pretty depressing reading.
That’s largely because it gives no confidence that today’s retirement market is doing a better job for its customers despite all the high hopes for “pension freedom”. But it is also recognition of the massive effort needed to improve outcomes in the future.
The advice gulf
One of the catalysts for the 2015 pension reforms was to address dissatisfaction with the “two-tier” system that meant that advised clients who received help shopping around usually ended up with much better deals than non-advised clients who tended to accept whatever their own provider offered.
It’s pretty clear from today’s report that the changes have succeeded in entrenching that two-tier system.
If the reforms have made a difference, it is in pandering to people’s behavioural bias towards preferring to have money now rather than in the future. Over a million defined contribution pension pots have been accessed, with more than half fully withdrawn.
Smaller pots are being totally withdrawn, often without consideration of the tax implications or effect on long-term incomes. Larger pots are being partially withdrawn but the focus is on getting the cash out with little regard being given to the importance of nurturing the money being left behind.
Haven’t we just had a report suggesting the value in many investment funds is questionable?
The findings are particularly worrying in a country where most people save too little into pensions, retire with pots that are too small and tend to underestimate how long those pots will need to last.
You can argue that people are best placed to make the best decisions about their own money, but that’s not what this report tells us.
In the industry, we know how difficult and risky it is to try to create sustainable incomes that will last for years into the future. Where’s the evidence our customers are capable of doing a better job on their own?
The penny drops…
The report says half of those aged 55 to 59 who cashed in pensions spent half a day or less researching their decision, and that was mostly on how to do it as quickly as possible.
The reports says: “Rarely was their focus on the future and any of the broader issues around how much they would need to live off, how long they might live for and what their pension might be worth if they had left it…”
The FCA describes a “penny drop” moment for many respondents in its research, making them start to question whether they had acted too hastily without understanding all the facts.
Two pieces of information were particularly impactful: information about life expectancy, and information on average incomes in retirement and the size of savings needed to deliver this, making them question whether spending money today really would make no difference in the future.
While some think of being able to cash in pensions as “free money” or “like winning the lottery”, their ideas change when confronted with some facts by the researchers.
As the FCA said: “A few are very vocal in admitting they have made a mistake at this point, while the body language of many others indicates that they are worried they have made a mistake.”
Bridging the information gap
Without good information, people are destined to make bad decisions. The non-advised market is riddled with misconceptions and misinformation. It’s going to be an uphill struggle to turn things around.
While we support the FCA’s proposed options, we also believe there is a much stronger role for default options to help guide consumers, in particular that all retirees should be opted in to formal pension guidance before accessing pension money.
The notion of “pension freedom” is probably the biggest misconception of all. Pensions are not prisons, from which money needs to be liberated as soon as possible. They are more like fortresses – sturdy defences against tax, behavioural biases and scams.
Stephen Lowe is group communications director at Just