Industry reacts to Pension Freedoms review proposals

18 January 2022

The Work and Pensions Committee has called on the Government and regulators to carry out a more active role around pension freedoms, including introducing automatic enrolment to Pensions  Wise guidance, ‘decoupling’ tax-free cash from pension pots and tackling increasing complexity.

In its review of the pension freedoms introduced in 2015, the Committee concluded that while the changes had been a success and should not be reversed, the system could benefit from a series of reforms which would better support savers accessing their retirement pot. These include:

  • Policymakers should aim for 60% of people accessing their pension for the first time to receive either guidance or regulated advice
  • The Government should trial automatic enrolment into Pension Wise guidance at the point of access and age 50
  • Decoupling taking tax free cash from making a retirement income decision, revisiting the idea of a ‘statement season’, the advice/guidance boundary and addressing complexity among other key areas of focus.

Commenting on the review, Tom Selby, head of retirement policy at AJ Bell, said: “Making sure people taking an income from their pension have access to the support they need is absolutely key to ensuring good retirement outcomes.

“We agree with the Committee’s conclusion that the freedoms introduced in 2015 have been a success which is in no small part because the pensions industry has been able to adapt to the changes. While we don’t agree with all the recommendations put forward by the Committee, MPs deserve credit for taking a pragmatic approach.”

Andrew Tully, technical director at Canada Life, said of the report: “The Work and Pensions recommendations are laudable and the goal to encourage at least 60% of people to use Pension Wise or pay for advice is certainly ambitious.

“Early intervention in the decision process is key here before people have made their mind up about what they want to do with their pensions, which is reflected in the recommendation to start the process at age 50. Hopefully more people will be encouraged to seek regulated advice when they realise how complicated the decisions around retirement planning can be.”

The Committee put forward a number of key recommendations across four areas.

Options when accessing pensions

Recommendations include:

  • Regulators should carry out a ‘scoping exercise’ on pension tax-free cash decoupling
  • The FCA should increase the number of people choosing a mixture of retirement products
  • The Government should continue to support the development of collective defined contribution schemes.

Current rules mean that anyone wishing to access their 25% pensions tax-free cash needs to make a decision about the retirement income route they wish to take with the remaining 75% which typically means entering drawdown or buying an annuity.

However, the Committee has suggested that regulators explore the benefits of ‘decoupling’, allowing someone to take their 25% lump sum without choosing a retirement option for the remaining amount.

Selby said: “It is not clear why such ‘decoupling’ would help savers make better retirement decisions. For those people who are focused on taking their tax-free cash, entering drawdown often makes little difference from a practical perspective. For people not choosing to draw an income when taking their tax-free cash, their money may very well be invested in exactly the same way as before, with identical charges. This risks introducing another retirement option and increasing complexity for customers for no obvious benefit.

“The idea that the number of people taking a mix of retirement ‘products’ should be increased feels flawed. Although we agree with the Committee that taking benefits in this way can be appropriate, this will depend on someone’s personal circumstances and preferences.

“Policy focus should instead be placed squarely on improving understanding and engagement, which in turn may lead to more people combining, for example, drawdown with annuitisation in retirement.”

Jon Greer, head of retirement policy at Quilter, commented: “While the rationale for decoupling the 25% tax free cash from the rest of one’s pension pot seems understandable, the government should exercise caution if they go down this path.

“This is because it would add more complexity to an already intricate pension tax system, given it would require ring-fencing of fund rights. Instead of adding more rules, the government could explore whether product innovation could achieve the same goal.

“At least when you access your tax free cash you then have to think about where the remainder of your pot is invested, which drives engagement. We can’t on the one hand try to boost engagement through Pension Wise appointments and on the other reduce engagement by decoupling the tax free cash.”

Supporting decision-making before accessing pension savings

Key recommendations made by the Committee include:

  • Greater clarity should be provided by the FCA on the advice/guidance boundary
  • The £500 pension advice allowance should be revisited
  • The Government must be prepared to drop plans for a pension statement season if the benefits cannot be demonstrated
  • A review of the ‘midlife MOT’ should be carried out to ensure it is working effectively.

The Committee has urged the government to ensure that at least 60% of people use a combination of Pension Wise and paid-for advice when accessing their pension pot for the first time.

According to the findings of the report, the ‘stronger nudge’ towards guidance being proposed by the Department for Work and Pensions will not be enough to make receiving pensions guidance the norm. Instead, it has suggested that automatic Pension Wise appointments are trialled.

Jon Greer, head of retirement policy at Quilter, said: “While we would welcome a trial of automatic Pension Wise appointment booking, certain behavioural shifts need to happen before these can be a success. With the rise in DC savings comes greater responsibility on the part of savers, and this is something they’ll need to understand as early as possible. Therefore, it’s best the automatic appointment happens as early as possible, ideally at the age of 50. Any later, and it’s likely people will have already made up their mind.

“Likewise, an early Pension Wise appointment will likely push people in the direction of financial advice, which really is the gold standard when it comes to getting the most suitable retirement plan in place. This can only be a good thing.”

Pensions Dashboards

The Committee also covered the area of Pensions Dashboards, which it said have the potential to be the “most influential policy” in helping people make good decisions when they first access their pension pots.

It has recommended that:

  • Pensions Dashboards must be properly resourced to get implementation right and ensure data is accurate
  • No consideration should be given to allowing transactions through Dashboards until they are well established
  • The Money and Pensions Service should develop a guidance service to support savers by using the data available through Pensions Dashboards

Selby said of the suggestion: “We welcome the Committee’s recommendations in this area, which should ensure the project remains laser-focused on its core purpose. It is possible that official guidance services currently available to savers could be enriched by using data available on Dashboards.

“However, using people’s information in this way could potentially push guidance providers closer to inadvertently providing regulated advice. It would therefore likely need to be accompanied by a proper review of the advice/guidance boundary to provide clarity.”

Wider government policy 

Finally, the Committee used its consultation to look at wider government policy.

Key recommendations include:

  • The government should do everything possible to ensure that any changes to the pension systems do not cause further complexity
  • The DWP and Treasury should work together to monitor progress of the pension freedoms.

Selby added: “Complexity is a significant barrier to engagement and Government is too often responsible for bamboozling savers with mind-bending new rules.

“We now have a pension system with three different versions of the annual allowance, seven lifetime allowances ‘protections’ and now potentially members who will have two different NMPAs within the same pension scheme. Nobody in their right mind would design a pension system like this from scratch.

“While we agree with the Committee that future changes should avoid complexity, Government should go further by reviewing the existing rules with the dual aims of simplifying the framework and encouraging more people to save for retirement.”

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