Overload and confusion

The changes mean that individuals can access their retirement assets from the age of 55 and have flexibility about how they withdraw the cash rather than facing restrictions that forced most people to buy an annuity.

One notable impact is that these freedoms have brought pensions to the fore – pension savings are now viewed more as real money and are being talked about down the pub. Anything that makes people think more about how they will fund their retirement should be viewed as a positive.

The reforms fit well in a world where people are more uncertain about when they will retire and more likely to continue to work in some capacity after their formal retirement. The ability to access savings in a flexible fashion, topping up income from work, will suit many.

Experience since the new rules were put in place shows that annuity sales are down significantly and individuals are more inclined either to take all their cash out or to stay invested and take out money as and when required.

This new freedom is a great opportunity for retirement savers, but also a great challenge. A recent study tracking in detail the retirement income decision-making of more than 80 defined contribution (DC) scheme members over a period of nine months, found widespread trepidation at the decisions to be made, with many viewing freedom and choice as a minefield, and not knowing where to turn for help.

Information received from providers created overload, and was often a source of confusion. The tabloid press was often viewed as the only source of clarity.

The research also found that the Government’s Pension Wise guidance service was well received by those who used it but, as is well documented, take-up was limited, and many of those who used it arrived at it late in their decision process and wished they had got there sooner.

For fear of making the wrong choice, most people making decisions about their pensions at retirement want to follow a path of least resistance, which typically means sticking with their current provider if they can.

The idea of shopping around for a better deal is not often entertained. The financial industry needs to better articulate the choices people face – including the option to leave money in the pension scheme until it is needed – and to adopt clearer and more consistent language in communications.

With the overload and confusion that people experience in navigating pension choices, there is a clear role for high-quality financial advice. However, the research also found barriers to scheme members benefiting from that.

Many people did not have an ongoing relationship with an adviser and were unsure of how to find one and not sure who they could trust. Some also found the economics challenging, either being reluctant to pay the typical level of fees, or in some cases struggling to find an adviser who would take them on.

This chimes with the issues outlined in the recent Financial Advice Market Review, which makes welcome suggestions about clarifying the role of technology in reducing the cost of delivery of advice and guidance, and creating the prospect of lighter-touch and lower-cost streamlined advice.

Better products will also be required to help scheme members get the most from the pension reforms. Many consumers will value simple, packaged drawdown solutions, and perhaps also flexible drawdown plans that can be mixed and matched with annuities that provide secure income in the later years of retirement.

Well-governed and low-cost default investment strategies will help savers who value pension freedom but do not want to have to engage with complex investment decisions.

And finally, we have to ask if we are seeing the beginning of the end of pensions? Will people under 40 clearly favour the Chancellor’s new Lifetime Individual Savings Account over traditional DC pensions?

It seems more likely that the Lifetime Isa will be a short-to-medium term saving vehicle that will be used for housing purchase rather than retirement income. The important thing will be to make the new vehicle as simple as possible to encourage take-up.

It will be good if more people reach retirement with some housing equity, but it is also important for people to have a retirement income too, and for those in employment to make the most of any employer pension contributions on offer.

The most effective way of encouraging retirement saving will likely remain low-cost, well-governed workplace pension schemes, with auto-enrolment and good quality default funds.

Alistair Byrne is senior DC strategist of State Street Global Advisors