Opinion  

Pension flexibility can also add complexity

Tiffany Tsang

Tiffany Tsang

The flexible retirement rules introduced from April 2015 are proving to be very popular.

However, while flexibility is beneficial, it adds complexity to already difficult decisions about retirement that many people may not have the knowledge, skills or motivation to tackle on their own.

Two years in, while we know a lot about the new retirement market and the opportunities it offers, there are also challenges that pose significant risks to consumer outcomes if left for too long without being understood and addressed.

The ABI’s latest analysis, found in its publication, “The New Retirement Market: Challenges and Opportunities”, has dissected how people are using the pension flexibilities; how well product supply fulfils consumer needs and demands; as well as what actions government, regulators and providers can take together to address the challenges that arise.

The aggregate picture emerging since April 2015 is that consumers are behaving sensibly with the new pension flexibilities. Demand for income products is also holding steady. Most pots worth over £30,000, and the majority of the money accessed, have gone into guaranteed income or flexible income products.

However, there are warning signs that should not be ignored - most obviously, the existing behavioural bias to take cash when it is offered. 

The reforms brought the Treasury £1.5bn in tax revenue in 2015-2016, £1.2bn higher than its original forecast. Consumers are clearly withdrawing from their pensions at a rate much faster than the government anticipated.

Most new entrants to drawdown are also taking the tax-free lump sum and no income. We also know that full withdrawals tend to come from those with smaller pot sizes and from younger cohorts.

This preference for cash instead of income in retirement remains a live concern: we need a study over time to better understand the drivers and the wider circumstances of the consumers making this choice, to judge whether sustainability is a concern.

Our analysis is that the appetite for cash is driven by behavioural factors and not a lack of supply of products. The spectrum of consumer needs and preferences are being met by a wide range of products.

For even the smallest pot sizes, there are accessible and affordable retirement products available, for new and existing customers.

The market has seen innovation combining guaranteed and flexible income, reflecting long-standing consumer needs for both security and flexibility, and new ways to interact with providers and advisers through the development of automated advice and other digital tools.

The ABI will continue to monitor whether those with the smallest pots still have access to appropriate retirement solutions, but it is important to note that product innovation will not be the only answer to the challenges facing consumers in the new retirement market. Ultimately, people need to be saving more, and saving sooner.