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Just: ‘Pensions are not prisons…They are fortresses’

Just group communications director Stephen Lowe

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 Over a million defined contribution pension pots have been accessed, with more than half fully withdrawn.

Smaller pots are being totally withdrawn, often without consideration of the tax implications or effect on long-term incomes. Larger pots are being partially withdrawn but the focus is on getting the cash out with little regard being given to the importance of nurturing the money being left behind.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.

FCA: ‘This is not an indictment of pension freedoms’

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…”

Pension freedom withdrawals top £10bn

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


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. Given that over 90% of the pots totally withdrawn were under £30k (and I suspect many will be towards the lower end of the scale) I believe the answer to Stephen’s question is that: a) the tax consequences are minimal; and b) the effect on long-term retirement incomes will be equally minimal.
    The answer to b) is almost certainly backed-up by another statistic in the report that stated 94% of those who fully encashed had other pension funds and sources of retirement income.
    So as far as this adviser is concerned, not depressing reading at all – if you are a provider who makes a nice fat margin on low value annuities on the other hand…

  2. Hi Kevin, thanks for taking the time to make a comment, appreciate the engagement. On Tax, from p56 point 4.36:

    “Well, [tax] hit me a bit harder than I thought it would. I thought the tax on the whole sum would be about 25%, but it ended up being closer to 35%. It never got explained to me at the time.” Male (55-60), £15k-30k pot, full withdrawal”

    and on the 94% point – a bit longer answer I’m afraid – it does say 94% “had other sources of income beyond state pension” in point 1.7. But I think that over-exaggerates the situation. Fig 24 is a list of “most significant sources of income in retirement”. I think it’s another two-tier issue really so where people have a good slug of DB then it won’t be a problem, but where they don’t they will struggle. 

    Point 4.33 says: “For 41% of consumers the withdrawn pot was their only private pension arrangement, as these consumers had no other DC or DB savings (Figure 25). A further 15% of consumers only had additional low DC pension pots and/or DB pensions.

    Then in 4.34 there is a list of what is says are “other sources of retirement income” but the table is headed “wider wealth of consumers”. These include income from employment, financial help from friends or family, other state benefits, inheritance received or expected. Quite a lot isn’t actually their wealth at all or not necessarily wealth they can depend on in later life.



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