Opinion  

Are providers ready for pensions freedom?

Having reviewed the results of several consumer polls that published their results over the Christmas break it is striking how little awareness there is among the target audience (those aged 55-70 years) about the new options for accessing pensions pots which will all be available to the over 55 year olds in less than three months’ time.

The International Longevity Centre UK commissioned a survey of some 5,000 55-70 year olds, found that roughly 40 per cent of people with less than one year to go until their planned retirement had actually made a retirement plan and only 35 per cent actually understood what drawdown meant. For some 70 per cent, a secure income in retirement is their top priority – an income which is presumably not exposed to the vagaries of the stock market or macro-economic outlook.

A second survey by YouGov with an even larger sample, confirms the continued desire to secure income in retirement. So for many of these people an annuity still looks like the best bet. So should our real focus be on ensuring that the majority of pensioners that are likely to be annuity purchasers are:

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1. Using the Open Market Option,

2. Exploring how to optimise that annuity by declaring any medical conditions which might give them access to an enhanced annuity

3. Exploring the positive impact of delaying annuity purchase thereby opening up the potential for a more generous annuity settlement, and even

4. Exploring a rash of new guaranteed annuity products that will emerge as 10-year limits on guarantee periods are lifted?

But reading between the lines of these survey results, it is also clear that there is a massive amount of education that is still needed as baby boomers in their droves (perhaps 650,000 per year for the next few years) reach retirement age still consider retirement is a one-shot deal – that is, thinking that at 65 years (or ideally sooner) “I will stop working and start drawing on my pension”. In other words there is still a clear propensity to ‘cash out’ (that is, buy an annuity straight away or take a large lump sum) when, in most cases, these options will make them worse off in retirement by doing so.

The danger therefore is too many people will only get enough information and advice about the new pension freedoms to stimulate more of them to cash out - picking up an unnecessarily large tax bill and exposing themselves to a higher risk of running out of money even before they reach their final, frailer years when they really will need to depend on these funds.

To be fair, the options are complex. Capped drawdown (currently set at 150 per cent of annuity value of a pot) will be converted to Flexi-Access Drawdown funds come 5 April if the capped drawdown policyholder exceeds their limit. By doing so they trigger the new much lower Money Purchase Annual Allowance of £10,000. So suddenly many drawdown policy holders going down the FAD route may find themselves facing a tax bill if they take advantage of their new found freedoms. FADs also replace current flexible drawdown funds. There will be no restrictions on the amount of withdrawals permitted from FADs.