Two and a half years on and as MPs prepare an inquiry, Money Marketing looks at the legacy of the flagship reforms
Pension freedoms are in the spotlight again. The work and pensions select committee has just announced it will investigate whether the reforms are delivering better retirement outcomes for consumers.
It is not the only group looking at pension freedoms. The FCA is also looking at whether drawdown plans provide value for money and suitable investment choices for those taking advantage of them.
Pension freedom rules were introduced in 2015, giving those aged 55 or over unfettered access to their retirement savings. At the time, there were well-publicised concerns this would lead to savers blowing their pensions on flash cars and holidays.
But there is little evidence of this “Lamborghini” effect. In fact, it appears to be “reckless caution” rather than “reckless spending” that legislators and regulators want to address.
The biggest success of the pension freedoms has been to boost the appeal of pensions as a savings vehicle. Hargreaves Lansdown head of retirement policy Tom McPhail says the pension freedoms have proved to be “immensely popular”.
It is important to review any major policy change to ensure it is delivering what it set out to do. But McPhail says he does not see any appetite to unwind the reforms. However, he says he would like to see MPs addressing some key areas of concern.
These include the provision of advice and guidance to ensure consumers choose appropriate investment and income withdrawal strategies.
The select committee said this will be one of the issues it looks at. Others include defined benefit pension transfers and protecting consumers from pension scams.
Ahead of the inquiry, Money Marketing takes an in-depth look at whether the freedoms are working in practice and whether they have lived up to their promise two-and-a-half years on.
New pension norms
There is no doubt these reforms have had an immediate effect on when consumers access their pension savings, and how they take these benefits.
FCA data shows accessing pension pots early has become “the new norm”.
More than a million defined contribution pensions have been accessed under the pension freedom rules and 72 per cent of these pots have been accessed by the under-65s.
There has also been a dramatic shift in the way people use their retirement savings. Prior to pension freedoms, 90 per cent of pension pots were used to buy annuities, according to the FCA’s recent Retirement Outcomes Review.
There are too many cases where savers are withdrawing their pension and keeping it in cash
Today, more than half of those accessing their pensions have cashed in their pots entirely (although most are smaller pots worth less than £30,000).
Of the remainder, drawdown is now a more popular option than an annuity, with almost twice as many people selecting that option.
Worryingly, the FCA review shows most investors are taking the “path of least resistance”, with few shopping around for drawdown products.
Around a third of those going into drawdown have done so without taking advice. Prior to pension freedom, just 5 per cent of drawdown purchases were unadvised.
These are often known as a “zero income drawdown accounts” as they are simply being used as a means to access tax-free cash in stages, rather than engaging in the investment process.
Access to advice remains an area for improvement, with the relatively high cost of professional advice posing a barrier to pensioners with smaller pots of final salary entitlements.
The best way for the Government to improve access to advice would be to reduce the regulatory cost burden on advisers and their clients, especially in the area of Financial Services Compensation Scheme levy funding. The single biggest positive step the Government could take is to fully implement their cold-calling ban, making clear the status of dodgy advisers who offer ‘free pension reviews’.
But fears that people would blow their pension pots have proved largely unfounded. As the graph below shows, withdrawal rates reduced over the two years since the freedoms.
In total, £12.7bn has been withdrawn from pension pots since April 2015, but the average withdrawal per person in the second quarter of this year was £9,300, down from £11,132 the year before, according to HMRC figures.
AJ Bell senior analyst Tom Selby says: “This drop follows an initial surge in activity, as people rushed to make the most of these new freedoms. The longer-term trend suggests most people are accessing their retirement pot in a sensible way rather than splurging their savings.”
He adds: “The evidence is encouraging, but the FCA will need to keep a close eye on the market to ensure consumers continue to manage their withdrawals in a sensible, sustainable manner.”