Intervention needed to help understanding of pension freedoms choices
30 July 2018
The Treasury Select Committee has warned over the current level of consumer engagement and understanding of the pension freedom choices available to them.
Since the introduction of the pension freedoms three years ago, 1.5 million defined contribution pension pots have been accessed. Of these, 72% belonged to customers below the age of 65, and 55% of pots were fully withdrawn. Among those pots not fully withdrawn, twice as many were used for drawdown products, with the popularity of annuities shrinking drastically.
Michelle Cracknell, chief executive of the Pensions Advisory Service, warned that people approaching retirement were not clear on the nature of pension freedoms, lacked a sense of ownership over their pension pots and are making decisions without understanding the implications.
She said: “Relative to pension freedoms, there have been a number of people who have said “I just want to move my money out of the pension pot into my bank account” with no specific reason for needing the cash. There is a very low level of ownership of pensions. People do not see it as their asset, when it is obviously so important for them to take personal responsibility for their retirement income.”
Cracknell highlighted the need for intervention to create “virtuous new social norms” such as a financial check-up at age 50 and default guidance whereby people will have to actively opt-out of an appointment with the future Single Financial Guidance Body if they want to access their pension pot without guidance.
Cracknell also suggested that prompts to seek financial guidance could be linked to a range of interactions with the public sector that occur during major life events, such as divorce.
In its Household finances: income, saving and debt report, the Treasury Committee concluded that consumer understanding of the pension freedoms could be improved by encouraging more people to take up advice or, at a minimum, free guidance available to them.
It stated: “The Single Financial Guidance Body, together with the Government, should consider how a kid-life MOT could be introduced, and develop proposals for increased outreach work to engage people with pensions planning. The FCA should consider the case for introducing a strong form of default guidance before people are allowed to access their pension pots.
“Finally the government should make a cross-departmental effort to identify opportunities to ‘nudge’ people towards pension guidance at life events where they interact with the public sector.”
However, Laura Suter, personal finance analyst at AJ Bell, said the government would need to act with caution when considering any of the Treasury Committee’s proposals.
“With all of these proposals, there is a concern that the Government, during the complicated Brexit negotiations, does not have the ability to spend the time on some of these changes that [the Committee] requires. While many of the proposals in the report are sensible and would help savers to engage with their money, the most damaging thing would be for ill-thought-out policy to be rushed through by a time-strapped Government.”
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