Freedoms failing consumers and will ‘lead to a scandal’ – Age UK

Pensions freedoms are failing to meet the needs of consumers and could lead to a scandal in the next few years, a new paper by Age UK has said.

Fixing the Freedoms, commissioned by the charity and written by consumer consultant Dominic Lindley, said that a lack of product innovation and the slow take up of advice and guidance mean that many are making risky decisions they may “come to regret”.

According to the charity, a lack of innovation since pensions freedoms was introduced in 2015 has left many older savers without the appropriate products to choose from, meaning they face many complex decisions without advice or support.

As a result of the findings, Age UK as suggested several recommendations including clear tax warnings on and better rates on cash deposits when consumers cash in their pensions.

Furthermore, the charity suggested more suitable products, including; enabling Nest to offer retirement income products; charge cap for income drawdown pensions; better investment pathways and a stronger annuity market.

Age UK charity director, Caroline Abrahams, said: “We are worried that a lot of older people with small and medium-sized pension pots, who do not pretend to be particularly financially savvy, are making risky decisions that could leave them in a mess in a few years' time, especially if there's a downturn in the market as is bound to happen at some point.

"Without decisive action the level of detriment will only increase as more consumers reach retirement. Engaging and empowering consumers by providing them with information and encouraging them to take up guidance is important, but not enough on its own.”

The charity also believes a pensions dashboard; default guidance with an opt-out option; extra help and support to vulnerable customers and stronger action on inappropriate defined benefit transfers will help the consumer make the most of freedom and choice.

Many experts interviewed for the paper believe that a market downturn or a “sustained period of poor returns” could result in a scandal in the next few years.

According to the Financial Conduct Authority (FCA), 90,000 consumers run the risk of running out of money in a market downturn, unless they reduce the amount they are taking out.

“The government and the FCA need to take a far more proactive approach to ensuring that these consumers get a good deal so that if and when a market storm hits, it does not destroy public trust in pensions and the reasonable aspirations of thousands of consumers for a comfortable retirement,” Abrahams said.

"The onus is on the government to make it easier for people with modest amounts of pension wealth to take smart decisions that really will benefit them into the longer term, not just today, through increased use of default options."

In April, the amount of pensions flexibly withdrawn since the introduction of pension freedoms topped £25bn.

Commenting on the paper, Just Group communications director, Stephen Lowe, said: “One major positive step since pension freedoms has been the Financial Guidance and Claims Act 2018, requiring all people accessing their DC pension to receive impartial guidance, unless they explicitly opt out. This powerful legislation has the potential to ensure getting guidance becomes a new social norm. However, the government has tossed the responsibility for designing the opt out process to the FCA.

“There are two vital points that need to be carried through to the practical implementation of this legislation. Firstly, that the opt out process is delivered by an independent body, such as Pension Wise, to remove any conflict of interest from the existing pension provider. And second that these reforms come sooner rather than later to help as many consumers as possible.

“Anyone who wants to see a retirement income market working well for consumers in future years needs to take the issues raised in this paper seriously. Benign financial conditions have been a big help – but let’s make sure future success is less down to luck and more to design.”

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