Are the pension freedoms faltering?

MPs to probe key areas of concern

Pension freedom
Pension freedom will falter without financial advice, critics say

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.

Martin Bamford 
Managing director
Informed Choice

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’.

Spending fears

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.”


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There are 8 comments at the moment, we would love to hear your opinion too.

  1. This is a bit of a curates egg. For some it is merely a means to increase the Revenue’s purse, and the fund managers and advisers profits. For some others it may be an escape-hatch from a final salary scheme where it is far from certain that the firm will survive. And yet for others merely a convenient get out by the firm to get shot of their long term liabilities.

    Overall I would have thought that the whole project needs tightening up.

  2. I fail to see the direct link between scams and freedoms.

    Scams took place prior to freedoms as did the use of UCIS within regulated pension.

    Anecdotally ‘pension busting’ was also more prevalent. I had a number of such come into view pre 2015 but none since freedoms.

    Whilst the risk of investment scams continue, these could take place irrespective of the freedoms (on the assumption it’s pension assets in question).

    The real danger under the freedoms is irresponsible spending of pension assets – but that risk applies equally to ISAs, cash savings etc etc. What some may see as ‘irresponsible spending’ is potentially another persons life goal.

    On the proviso the state doesn’t pick up the tab, I fear the danger is we moralise as to what people should be doing with their own money.

  3. Pension freedoms have provided so much opportunity – many of our clients’ retirement plans would be ruined if pension flexibility were to be reduced again.

    For our clients, it’s facilitated earlier retirement without the need to draw a reduced DB pension, or tax-efficient debt repayment, or a more luxurious retirement in early years… it’s even persuaded investors to remain in DB schemes as they feel that they have control over at least part of their retirement funds. We haven’t seen any examples of clients wanting to cash their pensions in without valid reason and, in most cases, the flexibility has allowed greater tax-efficiency rather than the tax grab that is criticised by many.

    The cost of advice is significant but it’s a huge amount of work to demonstrate to a client how a particular action could affect their long-term financial well-being, not to mention the work required to bury the final advice advice in 40 pages of key features, explanations, risk warnings and caveats.

  4. Agree particularly with the point re ISAs. It’s crazy that a client can withdraw £50K from an ISA without question but may need to go through a lengthy advice process to withdraw £50K from a pension. This in itself may lead to poor outcomes when it may be best for a client to take a blend of ISA and pension money.

  5. The biggest pension scam following pension freedoms has to be reducing MPAA to £4k retrospectively, after promoting drawdown to people with a number of contributing years left before retirement. Although I suppose having a large salary and DB pension softens the blow…

  6. Pension freedoms are not failing, the failure is that of the regulator and MP’s. Slow, indecisive, unclear, sit on the fence, have review after review, whilst everything burns around them due to their inability to act and take responsibility. Pass the parcel is the name of the game.
    Ronald Ragan once said “Government is the problem, if they would just walk away and let people get on with their business things would be much better”.
    The regulator moves at a pace of a snail, is never happy and only reports poor outcomes. They spend a fortune, review their reviews and achieve nothing of substance. MP’s, well they don’t have clue.
    Pension Freedoms are working for the vast majority, the problem is we live in a beurocracy were to protect the stupid 5%, they will legislate 100%, providing poor outcomes for the 95%, but believe they have achieved a great result as the 5% have been protect from themselves.

  7. Martin (above) I don’t think anyone could have worded that better, brilliant summary of how Government and the FCA operate.

  8. Q1: Have pension freedoms worked?
    Q2: Has the treasury seen a rise in taxable income from pensions?
    A: Yes. Well then they’ve done exactly what they wanted them to do.

    Everything else is consequential.

    This review will either scale back the freedoms to protect the pensions of future retirees or leave them where they are but introduce overly complex advice provisions via guidance bodies.

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