Can government and industry help ease the transition from accumulation to decumulation?

There have been numerous concerns, mainly voiced by advisers and those within the pensions industry, that without more government and industry help, many individuals will succumb to pensions scams.

One of the steps being taken by both the industry and the Department for Work and Pensions is the Pensions Dashboard, which aims to help people keep track of all the pension pots they have accumulated throughout their working life.

This is on the basis that a working adult will have, on average, 11 different jobs during their lifetime and that £400m of pensions go unclaimed.

The Dashboard is set to launch in 2019 but with that date some way off, there is a chance those seeking help with their retirement plans this year will be left floundering.

All of us in financial services – from advisers, to product and investment providers, right up to the regulator – should have one core objective and that is to make pensions understandable to everyone.Verona Smith

Anthony Rafferty, managing director of Origo, explains: “The Pensions Dashboard could bring together details of every retirement plan a person holds in one, accessible and simple screen so that they can be fully aware of the provisions they have now. 

“And this could be just the first step in helping our population prepare for, and understand the costs of, retirement.”

But can and should the government and industry be doing more to make the transition from accumulation to decumulation any easier and simpler for clients?

Ticket to retirement

Verona Smith, head of platform at Seven Investment Management, asserts: “All of us in financial services – from advisers, to product and investment providers, right up to the regulator – should have one core objective and that is to make pensions understandable to everyone.

“We need to remove the complication, jargon and general confusion.”

She continues: “Everyone should understand that their pension is their ticket to the retirement lifestyle that they desire.

“Unless you know the winning numbers for next week’s lottery your pension is your answer to your own retirement dreams.”

Pension freedom is no guarantee of a richer retirement, confirms Stephen Lowe, group communications director at Just.

“People have more choices, but need to understand their options to avoid the many pitfalls – exceeding their own capacity for investment risk, overpaying tax and falling for scams,” he points out. 

“Professional advice is one way to overcome lack of engagement and knowledge about the options and how the market works. Impartial guidance through Pension Wise is available for free but too few take it. 

“Our view is that, like auto-enrolment that has seen pension membership rise significantly, guidance should become the default option unless people explicitly opt out.”

For many, better communication from the pensions industry is the answer.

Many have emphasised the need to give pension savers an overview of all their pension pots far earlier in the accumulation phase.

Fiona Tait, technical director at Intelligent Pensions, believes: “The most obvious action, as well as doing as much as possible to protect people against the scams, is to create effective customer communications which highlight the key issues clients will have to face and help them to address them much earlier in the process than is currently standard. 

“I am very supportive of the idea of a ‘mid-life MOT’, where clients would be encouraged to take stock of their position and assess how prepared they are for retirement while there is still time to implement any changes to their accumulation strategy.”

She says this should take place when an individual has built up around 15 years’ worth of pension savings, but at least 10 years ahead of the point at which they want to access those savings.

“This will allow the individual to ensure they have gathered together the information they need about all of their pensions and investments and to start thinking about the part they will each play in the overall provision of income in later life,” she explains. 

“Specific decumulation strategies can then start to be implemented around five years ahead of the planned retirement, based on sound assumptions of when and how this is likely to take place.”

As Gareth James, head of technical resources at AJ Bell, points out: “Currently, the requirements around communication are focused heavily on the lead up to a retirement date that, at best, has ceased to have meaning and, at worst, didn’t exist in the first place.”

Starting early

He agrees with Ms Tait that savers need to start receiving information about their retirement options at least five, and possibly as many as 10, years before they can first access their pensions.

“Communication then needs to continue not only until the point benefits are first taken, but while the pension freedoms are being used,” he notes.

“Providing information to someone at the point of access is almost meaningless if someone is simply taking their tax-free cash with no intention to draw an income for years. 

“Similarly, while individuals have the ability to change the level of income they can take at any point, the potential exists for their information needs to change at any point as well.”

What about the auto-enrolment model which Mr Lowe alluded to?

Peter Bradshaw, national accounts director at Selectapension, reasons that individuals are more likely to listen to their employer than the government when it comes to pensions.

“I think, perhaps, the employer could do more because they are probably trusted by employees more than most,” he suggests.

“Things, like the Dashboard, when that comes into effect will help because I guess a lot of people don’t actually realise what pension they’re going to get.”

Pension Wise, which offers “free and impartial government guidance about your defined contribution pension options” can be a useful resource.

Scott Gallacher, chartered financial planner at Rowley Turton, believes the site has been “a great help” in making the transition from accumulation to decumulation.

He adds: “The best thing the government could do would be to encourage people to seek professional independent financial advice.”

As Mr James notes: “We’ve moved from a binary retirement world, where most are either in accumulation or decumulation, to a world where the move into decumulation is a journey that can take many shapes and forms.”

He urges regulation to reflect this.

There is clearly more both government and the industry can do to ensure advisers' clients do not lose out when it comes to pensions.

eleanor.duncan@ft.com