DrawdownJul 1 2019

Lack of appropriate products creates risk for pensioners

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Lack of appropriate products creates risk for pensioners

A lack of innovation around the pension freedoms is pushing older savers to make complex pension decisions they may not fully understand, a charity has warned.

In a paper published yesterday (June 30) Age UK warned many older people were making risky decisions when entering drawdown and were lacking access to appropriate products.

Pensions freedoms were introduced in 2015 and allow individuals to access their pensions in any way they like from age 55.

This means people who may previously have retired on an annuity now have access to complex income drawdown products they may not fully understand.

Age UK investigated the development of retirement income products, customer support, and industry thinking since the pension freedoms came into effect.

It found many older people were unaware that they need to factor in tax bills and state benefit rules when accessing their pension pot and found it challenging to understand the flexibilities.

The charity warned savers with small to medium-sized pension pots were particularly lacking access to good-value and appropriate products, and did not have the tools to manage their money effectively. 

Caroline Abrahams, charity director at Age UK, said: "The pension freedoms introduced in 2015 have been really popular to date and there’s no doubt that many are enjoying and benefitting from the greater flexibility they’ve been given. 

"However, we are worried that a lot of older people with small and medium-sized pension pots, who do not pretend to be particularly financially savvy, are making risky decisions that could leave them in a mess in a few years’ time, especially if there’s a downturn in the market as is bound to happen at some point."

The charity warned that a scandal related to pension freedoms could emerge over the next few years as a result of a market downturn or a sustained period of poor returns leading to losses.

Age UK called on the pensions sector to offer better guidance for those cashing in their pension as well as better suited products.

In particular the charity asked for clearer warnings on tax payments, a charge cap for income drawdown pensions and for the government to enable Nest to offer retirement income products.

It also wants to see clearer warnings about the impact on state entitlements when accessing a pension pot, extra help and support for vulnerable customers and stronger action to end inappropriate defined benefit transfers.

Ms Abrahams said: "Engaging and empowering consumers by providing them with information and encouraging them to take up guidance is important, but not enough on its own. 

"The government and the Financial Conduct Authority (FCA) need to take a far more proactive approach to ensuring that these consumers get a good deal so that if and when a market storm hits, it does not destroy public trust in pensions and the reasonable aspirations of thousands of consumers for a comfortable retirement. 

"The onus is on the government to make it easier for people with modest amounts of pension wealth to take smart decisions that really will benefit them into the longer term, not just today, through increased use of default options."

As part of its latest work on retirement the FCA proposed pension providers offer their non-advised customers a choice of investment pathways to meet their retirement objectives.

A consultation on the topic has recently closed and is now awaiting a response from the regulator.

Industry responses have been mixed, though many have warned against introducing default pathways.

Meanwhile research from the Association of British Insurers (ABI), published last month (June 4), found that about a third (34 per cent) of the 62,000 savers who accessed their pensions via drawdown for the first time last year didn’t take financial advice.

The industry body warned that by not accessing financial advice, thousands of retirees each month ran the risk of making "dangerous decisions" about what to do with the cash, which could eventually lead to them running out of money too early.

According to Yvonne Braun, ABI’s director of long-terms savings policy, pension freedoms gave consumers more options and flexibility in their retirement, but she cautioned "with greater choice comes greater risks".

She said: "To see levels of advice hitting new lows is disturbing, and risks leaving thousands of elderly consumers facing poverty later on in their retirement."

The government is offering people free at-retirement guidance sessions but the uptake is not as high as hoped.

amy.austin@ft.com

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