Life was simple back in the days before pension freedoms. Drawdown was considered a complex product that generally needed advice, shopping around was always a good idea and retirement savings were meant to last a lifetime.
But this all changed on 19 March 2013 when then-chancellor George Osborne took the cork out of the bottle. Fast forward to this year and we have the FCA releasing the terms of reference for its retirement outcomes review. This time there is a definite sense of the regulator trying to get the genie back in the bottle. However, I fear it may be too difficult even for them.
Let’s start with drawdown. The FCA paper highlights the sharp increase in drawdown since April 2015. Moreover, the proportion of drawdown cases that are non-advised has rocketed. This sounds like an accident waiting to happen. But is it?
Our experience is that most of these customers are simply taking tax-free cash from their retirement savings. Technically this means they have gone into drawdown but it is not what many consider as income drawdown – that is, investment-based lifetime income. All that has happened is that a customer has taken a lump sum withdrawal. Perhaps we should be more concerned about the large proportion of people that have cashed in their entire pots and paid a load of tax.
This also explains the increase in non-advised drawdown. Those taking tax-free cash do not consider that they are retiring and so see little need for retirement advice or even guidance.
This may explain why so few people accessing their pension seem to be using Pension Wise. Who wants to have a 45-minute retirement planning discussion when they have already set their heart on that new kitchen?
Obviously it would be great if people did have a retirement plan before they took any money from their pension. But that was not really part of the government narrative. It is the people’s money and the story said that they should be trusted.
But surely people should shop around? Well, maybe not.
Many accessing pensions will now be in charge-capped, IGC or trustee-governed plans. They will often not be charged for accessing their funds and, if active members, they can generally continue receiving employer contributions.
What, then, is hoped to be gained from switching provider? Rather, there is a risk switching provider could lead to higher charges, loss of employer contribution and even death benefits. Shopping around makes sense when buying rate driven products such as annuities. Of course, we need to make sure clients are getting good value but that does not always mean switching products.
The retirement outcomes review is welcome but we need to recognise that the genie is well and truly out of the bottle. More importantly we need to remember it was the Government, not the pensions industry, that took the cork out. We can encourage people to make better choices and seek advice or guidance but until this is seen as a benefit and not a barrier to freedom we will be fighting a losing battle.
Richard Parkin is head of pensions at Fidelity International