Blog – Freedom without direction

The introduction of pension freedoms in 2015 was arguably the biggest shake up to the decumulation phase of people’s retirement journeys this century, but are pension holders still ill-equipped to handle this relatively new-found freedom?

Figures from the Financial Conduct Authority (FCA) found that the proportion of pots that were accessed for the first time by people who had taken regulated advice fell by 3 per cent year-on-year in 2020/21.

This left just a third (33 per cent) of newly accessed pots during the year being accessed by pension holders who had taken regulated advice.

In my experience, people’s knowledge of pensions is not sufficient for two-thirds to be accessing their pots without advice, which could lead to poor retirement decisions and financial issues in later life.

Of the pots that were accessed for the first time, 341,404 were fully withdrawn, including 1,499 people who fully withdrew more than £100,000.

The government and regulators have been making efforts to improve the use of Pension Wise, with the government and the FCA pushing ahead with their ‘stronger nudge’ requirements from 1 June 2022.

This will require providers to offer to book a Pension Wise appointment for individuals when they seek to access their pension, but falls short of automatically booking an appointment.

As the Pension Schemes Bill made its way through parliament, an amendment was tabled by Work and Pensions Committee chair and Labour MP, Stephen Timms, and co-signed by Conservative and SNP MPs, for mandatory pension guidance as savers approach retirement to be included in the bill.

This was rejected by the House of Commons, with Pensions Minister, Guy Opperman, later stating that the potential cost of an automatic system for Pension Wise appointments would be “in excess of £45m”.

Timms has continued with his campaign to get automatic appointments on the agenda, calling on the government to trial automatic Pension Wise appointments and to set a target of at least 60 per cent receiving advice as they approach retirement earlier this year.

Capitalising on inertia was one of the key reasons that auto-enrolment has been seen as such a success, and it would likely provide the same benefits if applied to automatic pension guidance.

Furthermore, the inertia in retirement saving is only exacerbated by auto-enrolment, as people get used to just leaving their pension alone and thinking that it will all be sorted out for them, leaving them vulnerable when they approach retirement with this mindset.

This is likely to become even more apparent as people of my generation, who have never known anything different, come to access their pensions in 30 years’ time.

My parents, for example, are both intelligent professionals with a decent grasp of finances, but their knowledge of pensions is lacking, and they seem perfectly comfortable ‘sleepwalking’ into retirement, despite my protests.

I do not see a letter or email from their pension provider offering to book an appointment with Pension Wise as a catalyst for them taking their retirement more seriously.

Timms has warned that the 2015 pension freedoms reforms could be seen as a “failure” if savers are not more actively supported in making their retirement decisions.

Indeed, guidance does seems to be a missing piece of the puzzle, as Timms said, in helping make pension freedoms a success, and more work needs to be done to help those with little to no knowledge of how to plan their retirement.

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