Rising full withdrawals and unsustainable annual withdrawal rates risk seeing pensioners run out of money in retirement, an Association of British Insurers report has warned.
The report says 40 per cent of withdrawals are at an average rate of 8 per cent, more than double the 3.5 per cent rate that should ensure a 95 per cent chance of not exhausting savings in retirement.
The report also calls for the Money and Pensions Service to develop a later-life review to help people plan during their retirement, and implement the lessons from recent trials for a stronger nudge to guidance. The ABI points to data from the FCA showing that 48 per cent of people accessed their pension pots without getting registered advice or guidance in 2018/19.
The report, published five years on from the implementation of pension freedoms, calls on the Government to set up a Retirement Commission to advise on policy changes needed for good customer outcomes in retirement.
But Baroness Altmann, the former pensions minister, says some of the conclusions of the ABI report are ‘misguided’, arguing greater take-up of free guidance is needed, but that this should not be left to providers to deliver. She has called on the Government to use the Pensions Bill to mandate independent guidance at key moments through the savings journey.
Experts have cited multiple examples of sub-optimal behaviour at retirement. Around a third of non-advised pots are invested wholly in cash, and 94 per cent of non-advised customers have taken the drawdown plan offered by their existing provider.
ABI director general Huw Evans says: “The jury is still out on the success of the pension freedoms. We will only be able to judge their true impact decades from now, once it is clear whether those who have exercised their choices have the retirement that they were hoping for.”
ABI director of policy, long-term savings and protection Yvonne Braun says: “Nearly five years on from their introduction, it is now time to review how the pension freedoms are working. They may have brought about a retirement revolution, but it is too soon to tell how things will turn out.
“This report highlights some warning signs. We urge Government and regulators, working with the industry, to act on our recommendations, to deliver the changes needed to improve the outcomes for present and future retirees”.
Baroness Altmann says: “The Report released by the ABI is an important addition to the debate around pension freedoms. However, it draws conclusions which are not necessarily in the best interests of customers. There is clear evidence that customers are cashing in their pensions in far larger numbers than ever before, but that does not prove that these decisions are incorrect.
“Most people have several pension funds and, if they are withdrawing one but still have others, they will not be at risk in the way suggested. We just don’t know and proper analysis is urgently needed to see the full picture. It is five years since the new regime was introduced and we need to know much more than we currently do.
“It is clear that people are not getting the free guidance they were intended to have when pension freedoms were announced. The answer to this problem of people not receiving the help that was designed for them to enable them to make the most of the new pension regime, is not to just allow pension providers to offer the guidance instead. Such a move would put customers at risk of being sold unsuitable products, rather than having the truly impartial help that they need.
“I have tried to suggest amendments to the Pension Schemes Bill to cater for this and to set up better lines of defence for customers who call their pension provider asking to transfer their pension or withdraw their funds.
“The first line of defence would consist of providers asking a few basic questions, which could help identify scams and prevent customers moving their money to fraudulent schemes. In particular, asking whether they received a cold call which initiated the transfer request, whether they know the person who recommended this course of action, whether they know anything about the investment they want to move to, or whether they have been to PensionWise or used an IFA, could help protect customers better. The second line of defence would be to urge the pensions industry to automatically send people to the free guidance service if they have not had professional, regulated advice. The ABI proposes risk warnings, which is a good idea, but not sufficient to protect customers adequately.
“Ideally, everyone should be directed to PensionWise as a first line of defence against making poor decisions but less than one in ten people are using this excellent service. Talking to a pension provider’s helpline is no replacement for independent unbiased guidance or advice. I understand why providers would prefer to help customers in this way, but that is not the right answer. There needs to be far more automatic use of PensionWise before people take money out of their pensions. That way, someone can explain to them why withdrawing or transferring is not a good idea and explain there are many advantages to keeping money in pensions rather than paying tax on large withdrawals.
“There is an opportunity in the current Pension Schemes Bill to improve the protection for consumers. I do hope the Government will recognise the need to do so, not least because pensions have significant amounts of taxpayer funding as a result of generous tax reliefs, and if people do not spend their pensions wisely, or do not realise the advantages of keeping them till much later life, then future Governments will have to deal with many more poor pensioners in years to come.”
Scottish Widows retirement expert Robert Cochran says: “There are understandable concerns that people may run out of money by dipping into their retirement savings, especially as our research shows the average Brit underestimates their life expectancy by five years. This means the average retirement is 30 per cent longer than many expect and equates to an £80,000 shortfall in pension savings. What’s more, many workers may be lulled into a false sense of security by auto enrolment, believing that the minimum 8 per cent saving level will be enough to stand them in good stead for later life.”
Report recommendations:
- Regulators should use the greater flexibilities post-Brexit to adapt rules on guidance and advice to achieve a step change in the support available to customers.
- The DWP should require defined benefit pension schemes to provide scheme members who wish to transfer their pension to a defined contribution scheme with a letter warning of the risks.
- The Money and Pensions Service should develop a later-life review to help people plan during their retirement, and implement the lessons from recent trials for a stronger nudge to guidance
- The Government should set up a Retirement Commission to advise on policy changes needed for good customer outcomes in retirement.
- The industry will undertake more research into how people can be supported to make sustainable withdrawals to ensure they don’t run out of money prematurely.
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