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Ros Altmann: Why we must stop bashing pension freedoms

The new flexibilities provide much better retirement outcomes but there is more to be done to ensure the system works fairly for all

Ros AltmannHow are the pension freedoms working? Some commentators suggest the recent FCA retirement outcomes review shows the new landscape is failing customers. But I believe such conclusions are misguided.

The new landscape is a major improvement on the previous system. Yes, more progress is needed to ensure the reforms work properly for customers but there is much unwarranted criticism.

Of course many people are taking money out of their pension funds. That was the idea. But only a tiny fraction of the 4.7 million eligible pots have been touched.

Concerns about 100,000 people each quarter withdrawing funds seem overdone. Far more than 100,000 people a quarter were buying annuities under the old regime, often getting the wrong product at a poor rate.

FCA sets out problems of post-pension freedoms market

In fact, the majority of those accessing their pots are taking only tax-free cash or withdrawing mainly small funds. Ninety per cent of customers cashing in have other retirement income and many used the money to pay down debts or for home improvements (probably better for their needs than buying small annuities).

Of course many people are taking money out of their pension funds. That was the idea.

The FCA expresses concern about people withdrawing money before age 65. Again, this is less of a problem when one considers the majority of annuities were previously bought below 65. Annuity purchase should ideally be later.

Just because twice as many people are now using pension drawdown rather than annuitising, does not indicate failure. Again, this was the point of the reforms.

What is worrying is that three in 10 drawdown customers receive no advice and most are staying with their existing provider rather than finding potentially better products elsewhere.

If good value drawdown products with well-designed investment approaches were prevalent this would not be such a concern, but many are currently expensive and confusing.

That said, at least drawdown enables customers to move to better products in future, unlike irreversible annuity purchases. If people do not get drawdown right straight away, they can change their decision.

Valid concerns are also expressed about pension fund withdrawals just being put into bank accounts or Isa investments. People may have been taxed on the withdrawals, while also giving up the tremendous tax-free benefits of pensions.

Clearly, many do not realise the brilliant tax benefits of pension investing. No income or capital gains tax, pensions can also pass on free of inheritance tax.

Stand-out injustice

Here, though, after highlighting the scandal of net pay schemes in my last column, I want to mention another one – one which more involves low earners, although it could soon impact those with larger funds too.

Nest (the Department for Work and Pensions-sponsored pension scheme of last resort with more than four million members) pays death benefits on a non-discretionary basis, forcing unused pensions into their estate.

Nest is the largest auto-enrolment workplace provider and has just removed its contribution cap and started accepting transfers at an attractive 0.3 per cent annual charge. Yet its members risk losing 40 per cent of their savings unnecessarily. Most Nest savers will be unaware of this problem and swift action to remedy such an injustice is important.

Surely we have had enough pension scandals over the years? It is shocking that new ones are being created by the Government itself.

Overall, then, the pension freedoms and accompanying flexibilities provide much better retirement outcomes, and am not discouraged by the FCA research.

However, there is clearly much more work to do to ensure customers make better-informed decisions and the system works fairly for all. Encouraging more financial education, guidance and use of advice can help people make better financial plans to enjoy a richer retirement.

Ros Altmann is former pensions minister. Read more of her columns here.

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Comments

There are 7 comments at the moment, we would love to hear your opinion too.

  1. Andy Robertson-Fox 3rd August 2017 at 5:20 pm

    “Surely we have had enough pension scandals over the years?” says, Baroness Altmann. Indeed we have and the one that has been perpetuated by successive governments for around seventy years is an indictment of parliament. How can it be justifiable to not index link the State Retirement Pension of some 550,000 pensioners who live abroad but to do so for another 640,000 who also live overseas?

  2. Why must we stop bashing them.

    These ‘freedoms’ are freedom for HMRC, advisers, fund managers, platforms and DFMs to make more money. What it does for the clients isn’t that positive. And pray tell what happens when a market fall comes along?

  3. Robert Milligan 3rd August 2017 at 6:13 pm

    Same old, same old, What we have with Pension Freedoms is total anarchy, by not having given the required due diligence and consideration to the implications prior to its introduction, I have just visited a client who has been “advised” by Aviva to! whilst still being a member of his employers GPP, to crystallise his existing funds of said GPP, With Aviv, go in to Drawdown, with Aviva, and increase his future contributions to the GPP with Aviva, not matched by his employer, at the age of 63. and a basic rate Tax payer. Really!! All Pensions should only be transacted by Regulated Advice, and NOT by Sales people employed by the Product Providers, themselves. I whole heartedly support the concept of Pensions Freedom, just not the obfuscated way its being abused, mostly by Product Providers.

  4. Hymans Roberts figures for DB pension scams are frightening.10% of DB pensioners could be sleepwalking into making the wrong decisions. £100bn at risk. MM reported in City of London Police reported £8.6m of pension scams in March alone! The tip of the iceberg. And this woman tries to justify the Freedoms? It was bodged. Government and Regulator did stuff all to prevent this. They should have but neither will be held to account in the years to come.

    • If you remember, the regulator only found out about the pension freedoms on the morning of the budget, they had no warning – this was a shameless government tax grab – everything since has just been a massive firefighting exercise.

  5. Terry Mullender 4th August 2017 at 7:01 am

    A good article with some valid points.Only time (7 + years) will tell whether pension freedoms will be viewed as a success or a failure. My concern is that many people will severely deplete or exhaust their pension fund for numerous reasons, and then fall back on the taxpayer. You cannot “exhaust” an annuity.

  6. Ros Altmann: Why we must stop bashing pension freedoms.
    The state pensioners have no freedom except that of a limited number of countries to which they are ‘allowed’ to retire.
    Andy Robertson-Fox has already raised this issue and there can be no justified reason to deny indexation to any state pensioner.
    The state pensioner cannot opt out of paying the contributions because they are mandatory and the product at the end of your working life the indexation should also be mandatory.
    To do otherwise is fraud which is illegal and this is only made legal by the abuse of a parliamentary Act to enforce its discriminatory effect.
    The question is : When are the politicians going to get their houses in order ?
    We do not hear this raised enough and I hope that Ros Altmann will do what she said that she could not do whilst Pensions Minister because there is nothing stopping her now.
    We are waiting and listening.

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