“Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, any time they want, no cap, no drawdown limits.”
So began a frenetic year of speculation, researching and planning for what was to be a new dawn in the retirement income world on 6 April 2015. Six months on from Pension Freedoms Day, what has happened, and how have customers responded in the way they access their money purchase pension savings and the way they have sought advice?
On Budget day 2014 the message was clear: no one will have to buy an annuity. Ignoring that the compulsion to annuitise had actually been removed already, this was set to mark a major shift in how the UK population turned their pension savings into an income in retirement. Annuity providers’ share prices took a huge hit as early impressions were that the traditional way of paying yourself in retirement was looking to go the way of the Dodo.
But in reality, while annuities have taken a bashing for the past few years for being poor value or simply being outdated, they still have a purpose for some people.
Likewise, the then pensions minister’s now famous comment about pensioners being free to buy sports cars with their hard-saved nest eggs appears to have been a little premature.
I have felt strongly throughout this process that the vast majority of customers will not suddenly turn reckless with their life savings. Even in the previous flexible regime, when flexible drawdown was available for those customers with over £10,000 in pension income elsewhere, less than 10 per cent of people withdrew their entire pot in one go.
Studies that have been undertaken since April have looked at the response of pension customers to their new-found freedoms. While the shift from annuities, or guaranteed income sources being the default has come to pass to a certain extent, the wholesale switch to ad-hoc or bank account-style (a phrase I dislike thoroughly) access has not necessarily resulted.
However, a steep learning curve has been required for many people, with early research showing that around one in 10 of over 50s was not aware of the pension reforms and how they could be impacted by them (see figure 1).
ABI figures released in September highlighted the main changes in products purchased in the first few months of the new rules. Between April and June 2015 there were 17,800 annuities sold. This compares to 46,400 in the same period of 2014 and 90,000 in the second quarter of 2013. As anticipated, drawdown sales saw the reverse trend as 19,600 new drawdown policies were reported by ABI members compared to 9,500 the year before.
At the time the reforms were unveiled, there were a couple of messages that I wanted to repeat as often as I could. The first one, taken from French Enlightenment writer and philosopher Voltaire, (or alternatively Spiderman’s uncle), was that with great power comes great responsibility. The public have been given tremendous power to choose the route of how their pension savings could deliver the retirement income they want, and in the main have shown that they can be responsible with the choices they make. The same ABI figures showed that the average size of cash lump sum withdrawn from pensions in the first three months was just under £15,000.
The other message was, that while the discussions were regularly about the choice and difference between flexible access and annuities, that is far too simple a debate. While in years gone by it could have been acceptable for a customer to be asked to decide simply between different annuities, now the debate is much more about the person than the product.
Part of the reason for this is that the freedoms have not only provided changes to the way individuals can choose to take income from their pension savings, but how those savings can be passed on as a legacy. The changes to the taxation of pension funds left in drawdown on death, combined with extension of eligibility of drawdown for beneficiaries has meant that for many, leaving some of their pension savings as a legacy is just as important as securing a retirement income.
Much has been said about the role of guidance and advice in the new retirement world. Those customers with advisers need no persuading of its value; however those with no prior experience of the value of advice provide a very different proposition.
The concept of drawdown is a case in point. The same YouGov research highlighted that only 15 per cent of non-advised clients claimed a high understanding of drawdown. This rises to 36 per cent of people who have seen a financial adviser on a regular basis, highlighting one of the key benefits of financial advice.
But while full advice has always been available to those who need it, the reforms have served to change the dynamic and put different options on the table for those approaching or in retirement. The creation of the Pension Wise service was a clear acceptance by government that the public would need help navigating the new choices.
While the service suffered a stuttering start (see figure 2 for initial research into action by those 50 plus who were aware of the reforms), with its promotion not allowed during the crucial purdah period before the May General Election, its sheer existence and advertising spend has highlighted the need for people to seek help with their retirement choices. The Treasury recently announced that its service delivery partners had delivered around 20,000 face-to-face guidance sessions, with 1.5m hits on the website since April.
The role of providers in the developing world of pensions help is also worthy of mention to my mind. The risk warnings that providers are now required to provide, sometimes known as the ‘second line of defence’ have also helped customers to understand their options for turning their savings into a retirement income.
As mentioned previously, the simple choice between annuity or drawdown is no more, and clients are beginning to make the most of the help available to them in order to best ensure they did not make a poor decision.
My overiding view of the reforms is that they will, ultimately, turn out to be a positive change and will be viewed as such in the future. However, we must not be too quick to judge based on statistics from this initial period. I have been quoted before that the true measure of these reforms will only come in 15 to 20 years’ time when those who are retiring under the new rules today continue to enjoy the retirement for which they have saved and planned.
Adrian Walker is retirement planning manager of Old Mutual Wealth
Annuities have taken a bashing for the past few years for being poor value or simply being outdated, but they still have a purpose for some people.
The debate about choice and the difference between flexible access and annuities has often been far too simplistic.
The risk warnings that providers are now required to provide have also helped customers to understand their options for turning their savings into a retirement income.