Although it is still early days, the evidence we have seen so far suggests the pension freedoms are generally working pretty well.
Over £14bn has been withdrawn from retirement pots since the reforms were launched in April 2015. There is no disguising that is a massive sum of money. However, average withdrawals per person have dropped dramatically from over £18,000 in the first three months of the freedoms to £8,030 in the third quarter of this year – the lowest figure to date.
While clearly there will be some savers using the flexibilities irresponsibly, these statistics suggest any alarm about the behaviour of consumers on the whole is premature.
This is backed up by a survey we carried out of investors who have entered income drawdown since April 2015, with four in five saying they felt in control of their retirement income. Furthermore, a significant proportion have other sources of retirement funding – such as final salary pensions – to fall back on.
The Government does have a problem, however. With most people unable or unwilling to pay for regulated advice, policymakers had hoped its guidance service would help fill the knowledge gap. This has not been the case, with fewer than one in 10 people using Pension Wise before accessing their benefits.
This is particularly concerning for ministers because those who use the guidance service find it useful. According to research from Just, 88 per cent of people who used Pension Wise said they had a fairly or very helpful experience.
Furthermore, over two-thirds (67 per cent) said it made them think through their options more thoroughly and over half (55 per cent) said it made them consider the longer-term more than they would have done otherwise.
In response to these concerns, an amendment to the Financial Guidance and Claims Bill was proposed in the House of Lords. Specifically, the amendment proposes making guidance mandatory “before accessing or transferring defined contribution, defined benefit or money purchase benefits”.
Providers would be forced to ask consumers “at the point at which they require access or a transfer of their pension assets” if they have received guidance. If the answer is no, the provider would be required to “provide access to such information and guidance before proceeding”.
The Lords voted in favour of the amended Bill by 283 to 201, with the proposal now set to be debated in the elected House of Commons.
I do not doubt the intention behind this amendment is well meaning but, if enacted into law in its current form, it could cause huge problems.
It is not clear at all from the wording whether people would be forced to take guidance the first time they accessed their savings, or every time. Clearly, the latter scenario would be utterly ludicrous so I will assume for the purposes of this article it is the former.
In our experience, most people who get to the point of accessing benefits have already made their mind up (that is, they want the cash now). Frustrating savers who have already decided what they want to do with their money would cause outrage, with providers forced to deal with a barrage of complaints from customers angry at what they perceive as unnecessary delays.
There is also a problem of scale for the Government. If guidance became mandatory for all then presumably the Treasury would have to massively scale up Pension Wise with extra staff and resources. Where would this money come from?
In addition, the amendment appears to put the responsibility on providers to ensure guidance is taken. How exactly would this be administered? Would providers be required to book Pension Wise appointments on behalf of savers?
This seems like an unreasonable burden to place on an industry already creaking under the pressure of endless political change and regulatory intervention.
In fact, if the Government decides forcing people to take guidance is what it wants then it is for the Government to administer this process.
It is not my intention to do down what looks like a genuine attempt to boost engagement among consumers.
Indeed, our research points to a worrying “engagement gap” among savers using the freedoms, with 53 per cent having no idea where their money is invested and almost total confusion over how the death benefits regime operates.
But, to my mind, shoving people down the guidance route is the wrong approach. We should instead focus on improving and simplifying the communications consumers receive, ensuring people are genuinely aware of the existence of Pension Wise and promoting the value of regulated advice.
Whether savers accessing their pots choose to take guidance – or advice for that matter – should be down to them.
Tom Selby is senior analyst at AJ Bell