By Kathryn Fleming, Partner at Hymans Robertson
However, by the time we reach April 2024, it is estimated that around 6 million DC pots will have been accessed for the first time since the pension freedoms have been introduced in April 2015, will all of those members be reflecting with fond memories of the pension freedoms?
The pension freedoms were introduced as it was felt that the retirement market wasn’t working properly for all retirees. The pensions freedoms legislation came into force in April 2015, before that date many people reaching retirement had to buy a regular income (via an annuity). From April 2015, other options were added like cash withdrawals, flexible drawdown and combinations. At that point in time it was felt that annuities were rigid and expensive and a barrier to saving for retirement. The intention was to give choice to DC savers, particularly those with lower values, deliver better pension outcomes, and to allow savings to be accessed in a way that better meets savers needs.
Over the last 10 years, there have been many positives, for example, we have seen DC savers cash in small pension pots which have, on the whole, delivered an overall improved financial outcome in the short term. We have also seen many savers make their money stretch further by benefiting from being invested in the stock market over longer time frames. We have also seen creative retirement plans being actioned, with members accessing money in phases and /or using pension and ISA combinations to manage tax liabilities. When the pension freedoms have been accessed in a considered way, we are seeing the intended benefits.
However, the pension freedoms also introduced some financial anxiety for members that had to suddenly engage with something they have not prepared for. Many members know it is a serious financial decision that they have to take, and they have been wrestling with where to get information and who to trust. In recent years the tax free cash has also provided alleviation to short term financial pressures, but it may come at a longer term cost if other sources of income cease and / or the ability to work is no longer feasible.
The key to successfully navigating the pension freedoms has been for a member to be supported and informed. Unfortunately, the pensions industry was initially not given enough time to anticipate and respond to the “human factor”. What’s worse is, that 10 years on that’s still the case, with not all members receiving appropriate guidance or advice prior to navigating the pension freedoms. The consequences we have seen have been some avoidable tax bills being triggered, people leaving money in cash or entering into in appropriate or expensive drawdown products.
Unfortunately we have also seen a significant rise in savers being targeted by scammers. It is imperative that we keep our focus on how we can help members make better choices; increasing the access to guidance, affordable advice or financial coaching to support with their decision making. We also need to put in place decumulation defaults for those that won’t engage. We have taken baby steps with the stronger nudge to pension wise, but significantly more effort is needed to improve member outcomes.
The pension freedoms have been a minefield for many members and DC savings assets will be more material in the next 10 years so the potential for error increase in materiality. However, with this scale, this gives the platform for the pension freedoms to be a powerful tool to allow members to personalise and maximise their retirement incomes, by being able to flex and intertwine with other savings, but only if accessed with appropriate support.
We cannot wait 10 more years to get a better guidance and advice framework in place, we are hopeful we will see some meaningful changes this year as part of the FCA’s guidance and advice boundary review. In the meantime, we would encourage trustees and employers to review what support services that have in place, there will be gaps that can be filled. And finally, if you are curious, back in 2014 there were around 350 new Lamborghini’s sold in the UK each year, recent figures suggest this has increased to around 650… hopefully that’s a relief to readers.
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