Stephen Lowe: Pension freedom and control are not the same thing


The pension reforms have, to a large extent, been sold to the public on the basis that having freedom to access pension funds is the same as giving them control.

That is a bit like giving someone car keys on the assumption they already know how to drive. In fact, most of us would agree that being in control of a car depends to a large extent on education and experience and even then you cannot be sure what potholes lie ahead.

One major concern highlighted in the run-up to the reforms was the fear many people, keen to get their hands on their pension money, would unwittingly end up paying large slugs of unnecessary tax.

In some cases, people with modestly sized pension funds could easily find themselves paying higher rate tax for the first time in their lives, undoing much of the tax-efficiency of saving into the pension in the first place.

Our own research undertaken by YouGov into people’s understanding of the possible tax consequences of taking pension lump sums threw up some worrying results but also showed that even a little understanding can go a long way.

Nearly two-thirds of those aged 54-65 with defined contribution pensions had taken on board the message that people could take lump sums from age 55. However, not all had grasped that only 25 per cent would be tax-free, with just over two-thirds saying the Government had not made the extra tax clear when it announced the reforms.

What was particularly striking was that more than half of those who described themselves as “very likely” to take their entire pension as a lump sum changed their response later in the survey. Of those who started off with that stance, about one-in-five changed their view to “less likely” or were undecided, with about one-in-three becoming “unlikely” to take the pension.

Attitudes towards pension freedom changed as people proceeded through the survey, answering questions that highlighted details of how lump sums would likely be taxed. It seems people were seeing behind the headlines for the first time to the reality of how freedom might work, particularly in regards to the level of earnings and fund size that might trigger tax charges and the nitty-gritty details such as emergency tax codes.

These are early days in the pension freedom experiment. Take up of Pension Wise guidance does not yet appear to be at the levels most of us in the industry would like to see, given it is free and impartial and the savers have nothing to lose. That reinforces the importance of the additional or second line of defence to issue personalised risk warnings to ensure pension savers are not taking hasty decisions they may later regret.

Take-up of regulated advice needs to be higher to deliver better outcomes and so far there is little evidence Pension Wise is proving to be a pipeline for new business but after the bulge of those who have been queuing works through the system we may see a new norm emerge.

We would like to see employers and the regulator encourage more occupational schemes to put in place at-retirement services designed to engage and motivate members to make active decisions. On the more positive side, we are seeing the launch of simplified advice services that could meet the relatively straightforward needs for flexibility and guaranteed income likely to appeal to large sections of the pensioner population.

People have more choice than ever and therefore more responsibility. The new pension freedoms have not yet cracked the problem of how to encourage higher levels of engagement among that tier who failed to shop around or make active decisions under the old rules.

People are quickly getting the idea that this money belongs to them and not to the pension company, which is one step forward. So far they have freedom but need to work on gaining control. The battle remains ensuring they have the tools and the knowledge to use it to sustain their living standards through what, for most, will be a long retirement.

Stephen Lowe is group external affairs and customer insight director at Just Retirement