Personal Pension  

Retirement is about the person not the product

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Reform must not leave individuals behind

Like the moon landing (or Portsmouth’s 2008 FA Cup victory), everyone can remember where they were and what they were doing when George Osborne stood at the despatch box in March 2014 and delivered the sentence that still echoes through the pensions industry to this day.

“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But in reality, while annuities have taken a bashing for the past few years for being poor value or simply being outdated, they still have a purpose for some people.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.