In April 2015 the UK woke up to a world of freedom. Pension freedom. From that date if you had a defined contribution pension pot and were 55 or over, it was up to you what you did with the money. You could buy an annuity, you could drawdown your cash and leave some invested, you could buy a Ferrari (or a Lamborghini) if you had been particularly thrifty.
Of course sports car purchases would be limited to those who had been extremely thrifty and had some pension pot to spare. Actuarially most people who retire today will live a reasonably long time and need finances to support themselves. The state pension, whether the old one or the single tier system coming into force in 2016, is not particularly generous and although you may have enough money to buy a sports car now there may be better things to put your money into if you want to have a comfortable retirement.
Also the amount of money contained in pension pots (even the small ones) tends to attract pension scammers. They often have some very clever ideas of how you can use most of your pension savings for things you want to do, and somehow get it all back through guaranteed return investments in slightly bespoke assets in unregulated markets. These rarely turn out well for anyone bar the scammer and the tax authorities.
The Government was aware of this and in parallel with the new pension freedoms arranged for a number of bodies to provide pension guidance sessions for those approaching retirement. These included Pension Wise, a "free and impartial government service about your defined pension option" through which you can book a face-to-face or telephonic "guidance" session. In the spirit of highlighting the existence of the site we have set out the appropriate link below.
Six months on the House of Commons Work and Pensions Committee has produced a report (the Report) on how this system is working out.
The Report is pessimistic about how the guidance system is working in practice, which the Committee considers to be particularly concerning given that it was put in place to cover savers who could not afford, or did not want, independent financial advice. The Report is even pessimistic about whether it is possible to assess how the guidance system is working as there are very limited figures on key issues.
What information is available points towards very limited use of Pension Wise and associated guidance sessions (with one of the providers – the CAB – running at between 10 and 15 per cent capacity). The Report is also critical of the Pension Wise site describing it as "not fit for purpose". The main concern is that the site just provides basic information and a sign post; it does not include any dynamic calculators, nor any indication of how other financial issues (such as care costs, tax issues, property) would impact on an individual's choices at retirement.
On scams, the Report notes that these have increased following the introduction of pension freedom.
The Report makes suggestions on how to address these points:
- The Government should publish, or arrange to be published, quarterly figures covering the "journey" from considering what to do with a pension to the long-term consequences of those decisions.
- Pension Wise should provide far more information around a visitor's holistic financial position, and ideally provide an income calculator and illustrative examples for visitors.
- The Government and industry should work together to produce a pensions dashboard to highlight pension savings and retirement decisions.
- The Financial Advice Market Review should consider expanding the pensions guidance available from a single session to two or more. It should also consider who to provide affordable advice to, given the current gap between advice (expensive – particularly for those with smaller pension pots) and the free guidance sessions.
- On scams the Report welcomes the Government's plans to expand the industry's publicity campaign and suggests strengthening the requirement for providers to query when a member wants to take a transfer to what looks like a potential scam. It also notes "Project Bloom" an inter departmental project to co-ordinate Government's response to scams.
- The overall pension freedoms market needs to be clearer for users. The Report raises concerns over saver confusion in terminology – for example between advice and guidance and safeguarded and unsafeguarded benefits.
- Providers are also concerned over potential liability for "insistent customers":, those who get guidance or advice, and then decide to do something else with their money. The Report does not suggest a blanket liability exemption but views this as a concern that needs addressing.
The Report takes the view that if these issues cannot be addressed in the longer term then it may be necessary to implement a "default" retirement choice for those who do not engage with their pension choices.
All policies need time to bed down. However, the Report highlights some worrying anecdotal trends and provides some sensible conclusions. It is impossible to assess the success of a policy without monitoring it. If the policy is not monitored and savers make bad choices on their retirement options, there could be another pensions mis-selling scandal on the horizon.
The Report highlights the central problem with pensions in the UK. The type of financial advice that people need to make good retirement decisions is too expensive for a small to medium-sized pension pot to warrant. In the short term, the industry needs to work on bringing the cost of that advice down and the Government needs to improve the quality of guidance for those who still cannot access advice.
In the longer term people need to save more and understand retirement better. A person who has a larger pension pot, and understands how retirement works, particularly longevity, is likely to engage in proper retirement planning without too much prompting.