Further reforms and guidance are needed to safeguard pension freedoms outcomes, according to a new report from the Association of British Insurers.
The trade association’s report – which marks five years since the introduction of the freedoms – warns that the rate at which over-55s are making withdrawals from their pension pots could leave many at risk of running out of money in retirement.
The findings revealed that full withdrawals have risen to their highest level since the pension freedoms were introduced in 2015, with 40% of withdrawals at an annual rate of 8% and over which the ABI called unsustainable. On average, withdrawing 3.5% from a pension pot annually should ensure a 95% chance of retaining savings in retirement, but withdrawing 7% reduces the chances of not running out of money in retirement to just 60%.
Huw Evans, director general, ABI, said: “The jury is still out on the success of the pension freedoms. We will only be able to judge their true impact decades from now, once it is clear whether those who have exercised their choices have the retirement that they were hoping for.”
To date, over £30 billion has been accessed from pension pots, with latest figures showing that in 2018/19 alone, over 350,000 pension pots were fully withdrawn. However, according to FCA data, nearly half (48%) of those who accessed their pension pots in 2018/19 did so without regulated advice or guidance.
The ABI has called for more safeguards and support to protect consumers, including allowing pension providers to give more help to customers without crossing the boundary to regulated advice. It has also recommended that the Department for Work and Pensions introduce later life financial reviews to help people plan during their retirement, as well as mandatory risk warnings for people considering transferring from a defined benefit scheme.
According to the ABI, regulators should use the greater flexibilities post-Brexit to adapt rules on guidance and advice, while the government should set up a Retirement Commission to advise on policy changes needed for good customer outcomes in retirement.
Yvonne Braun, director of policy, long-term savings and protection, ABI (pictured), said: “Nearly five years on from their introduction, it is now time to review how the pension freedoms are working. They may have brought about a retirement revolution, but it is too soon to tell how things will turn out. This report highlights some warning signs. We urge Government and regulators, working with the industry, to act on our recommendations, to deliver the changes needed to improve the outcomes for present and future retirees.”
Stephen Lowe, group communications director, Just Group, suggested that the figures do not inspire confidence in the system.
He commented: “It will probably be decades before we have the full picture, when those who started taking money at the start of the new era start reaching their mid-eighties and beyond. These are early stages, but evidence such as high drawdown withdrawal rates from modest pensions does not inspire much confidence.
“Wealthier individuals are the most likely to be among the winners of the policy because they can afford to take professional advice and more investment risk while sheltering pension assets from inheritance tax. It is ‘Middle Britain’, those with small to medium-sized pension assets who depend on modest pension income to sustain their living standards, who are most at risk.”
Just Group said that when it asked industry figures whether the pension freedoms had created more or less certainty for consumers, nearly half (48%) thought the change had created more certainty for High Net Worth while 13% said less certainty. For ‘Middle Britain’, just 29% said more certainty and 44% said there was now less certainty.
Lowe added: “Clearly a policy that only works for one particular slice of the population but leaves the majority vulnerable is going to struggle to be a long-term success. That is why we must do what we can to support initiatives being taken by the FCA around promoting take up of the free, independent and impartial Pension Wise, easing access to advise, controlling pension costs and putting in place default investment pathways.”
Jon Greer, head of retirement policy, Quilter, said that while pension freedom reforms represented the biggest shake-up of the UK’s savings and investment industry in a generation, they have not been without their shortcomings.
Greer said: “The FCA has found that non-advised customers in particular are at risk of making choices that may not serve them well in the long-run. Around one in three non-advised pots are invested wholly in cash, which over time will be eaten away by inflation. And 94% of non-advised customers have taken the drawdown plan offered by their existing provider, whereas advised customers are much more likely to shop around for the best pension company to meet their needs.”
Greer says that going forward, it is vital that retirement behaviours are monitored closely to ensure the freedoms still work for consumers.
He added: “Stock markets have delivered broadly strong returns over the last decade, rewarding retirees that have kept their pot invested in flexi-access drawdown. But if global investment markets were to fall substantially – and history tells us they surely will at some point – retirees will need to be in properly balanced portfolios with appropriate risk controls in place to avoid drastic losses that will be compounded by income withdrawals.
“Similarly, although a lot of work has been done to protect vulnerable customers and restrict the prevalence of pension scams, they will not go away. A clause in the Pensions Schemes Bill currently going through Parliament paves the way to enable schemes to block a transfer where they suspect it is an attempt to defraud the customer. This is an important weapon for the pensions industry in tackling scams, however it is taking time to implement and we will only get the necessary regulation once the Pension Bill becomes an act. It is crucial that these additional protections continue to be re-enforced by ongoing awareness campaigns to ensure that customers are alert to the signs of a fraud.”
