Pension freedom fails to result in best deal for savers
New figures on take-up of the various at-retirement options made available since the 6 April reforms have been met with concern that so many pots are being cashed in and people are still not shopping around for the best deal.
The Association of British Insurers’ statistical release revealed yesterday (2 September) almost £2.5bn worth of payments have been made to customers in the first three months since the new pension freedoms came in, £1.3bn of which in cash lump sums, with an average payment size of just under £15,000.
In terms of those switching provider upon retirement, 45 per cent of annuity purchasers made a move, compared to 55 per cent for income drawdown, meaning around half of investors are failing to shop around for the best arrangement to meet their needs.
Tom McPhail, head of pensions research at Hargreaves Lansdown, commented the fact so few people are shopping around shows much more needs to be done.
“Politicians and regulators must focus on improving the pension withdrawal process; the goal should be for engaged and well-informed investors to be shopping around in a competitive market place; this is clearly not happening adequately at present.”
Calum Bennie, savings expert at Scottish Friendly, commented that there is still cause to be concerned that the statistics show so many relatively small pension funds are being cashed in.
“If people are not careful, hundreds, if not thousands, of pensioners could be left penniless and spending their retirement in poverty – or forced to continue working.
“The reason for this is, there remains a misconception that if an individual cashes in their pension and proceeds to spend it in its entirety, they will at least be able to fall back on the safety net of a state pension. However, this is not the case.
He pointed out that the ‘deprivation of capital’ rule means that if you simply spend your retirement fund, give it away or lose all of your money and end up needing to rely on the state for support, you will only be allowed to do so if the government agrees with your financial decisions.
Vince Smith-Hughes, head of business development at Prudential, commented that there is a point for advisers to consider here.
“These figures show that the average drawdown premium is considerably lower than before pension freedom began, which suggests there is a cohort of people who are in less of a position to crystallise losses when taking income from volatile funds.
“The volatility we’ve seen over the past few weeks should be a strong reminder to clients that there is a value in taking income from smoothed funds.”
Duncan Jarrett, managing director for retail at Aegon UK, agreed that last week’s market crash is a timely reminder that drawdown investors need to factor in potential market movements to their plans as their savings remain invested.
“The industry needs to get better at promoting the value of guaranteed drawdown which provides the flexibility of drawdown with a minimum income guaranteed as we expect assets in drawdown will continue to grow.”
