How 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.
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.
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.