The Association of British Insurers has suggested that the government should introduce a “cooling off period” for those pension savers who try to withdraw too much of their pot at once come 6 April.
In a report commissioned by the industry body and carried out by consultancy Ideas42, it found those using Pension Wise are likely to underestimate their life expectancy and misunderstand the risks around investing for retirement.
It proposed cooling off periods or additional steps whenever people seek to withdraw more than a certain proportion of their pot – either in one go or through sequential withdrawals of smaller amounts.
“While not restricting choice - as the funds will still be available to them - this will help to ensure that people are not acting in the heat of the moment,” it stated, adding this proposal has the support of Age UK.
On the subject of a second line of protection, where individuals are prompted with questions when accessing their pensions, the report stated: “These might include questions about medical circumstances, partners that might be dependent upon them, contingency plans if they’ve exhausted their pension, and their understanding of the tax implications of making withdrawals”
The document also suggested more distinct categories to help savers compare different products and more attention on following-up provider communications.
In terms of annuities, it noted that in order to combat one bad annuity option leading to the rejection of all annuity types, despite some being beneficial - the report pushed for the broad range of options and the differences between them being explained.
It also recommended that the guidance sessions need to encourage people to connect with their “future self” and help consumers overcome their fear of financial information.
Solutions could be as simple as making it easy to schedule and attend an appointment, with the report pointing out that small hassles, such as having to find out where the guidance sessions are located or appointments not being available at a convenient time, could lead to people failing to follow through on their intention to use the service.
The document concluded that concrete actions could be taken to try and increase the likelihood that people engage early in retirement planning; shop around and gather accurate information; and make a the best possible decisions in their own best interest.
“These range from simple changes such as providing reminders to attend Pension Wise guidance sessions to more systemic changes, like using employers as a channel through which to facilitate engagement in the retirement planning process.”
Yvonne Braun, director for long-term savings policy at the ABI, stated: “The new freedoms will radically shake up the retirement landscape, with consumers having much more choice and more complex decisions to make.
“But as the report highlights, making far-reaching decisions about the future is intellectually, psychologically and emotionally challenging, which can lead to suboptimal choices. The report should be a ‘must read’ for all who want to make the new pension freedoms a success.”