Freedom evolution: Less risk and more support for savers

Freedom evolution: Less risk and more support for savers

The launch of the pension freedoms in 2015 was a game-changer for savers.

Suddenly, they had a multitude of retirement options to choose from. For some, this felt like a liberation from the constraints of the previous regime, but for many others it made their retirement choices far more complicated than they had ever imagined. 

Freedom is an attractive concept. Intuitively, it seems fair and reasonable to give savers maximum flexibility to decide how to access their hard-earned pension savings. 

In practice, though, these reforms have served to accelerate a pre-existing trend: the transfer of risk from institutions to individuals. As a result, it is now clear that the excitement generated by the freedoms has, in many cases, not been matched by good outcomes for savers.  

To get the most out of the freedoms, they need to evolve, and we have developed proposals for further reform that we believe will facilitate evolution through innovation. 

Prior to the introduction of the freedoms, regulation required most defined contribution savers to purchase an annuity with their accumulated pension savings.

This was intended, in combination with the state pension, to provide them with an income for life.

Key Points

  • Pension freedoms gave people too much choice
  • Most savers do not take an interest in their pensions
  • We should have a system offering savers access to a default system

The liberalised regime introduced in 2015 allows people to access their savings in a variety of ways, namely: by purchasing an annuity; by getting an adjustable income (flexi-access drawdown); by taking cash in chunks (uncrystallised funds pension lump sum); by cashing in the whole pot in one go; or by mixing two or more of these options. 

Evidence suggests that the freedoms have had a dramatic effect on the retirement market.  

Savers have moved away from annuity products and now tend to favour flexi-access drawdown. Prior to the reforms, 90 per cent of pension pots moved into annuities in the decumulation phase.

By June 2018, the Financial Conduct Authority reported that twice as many pots were moving into drawdown than annuities and 2019 figures suggest that the downward trend in annuity purchases has continued. The total value of flexible withdrawals has risen steadily, and now exceeds £35bn. 

Risks that were previously borne by insurance companies are now increasingly borne by individuals.

No regulatory regime can protect people from all the risks inherent in retirement.

However, the freedoms opened up the possibility of people running out of money in later life, of their income being severely affected by market volatility, and of scammers taking advantage of them as they continue to make decisions long into their retirement. Clearly, these are serious risks. We believe that more needs to be done to mitigate them, especially as people come to rely exclusively on DC savings to fund their retirement. 

Supporting savers

One of the major challenges to achieving good outcomes for savers is their low level of engagement with pensions.The most successful pensions policy initiative in a generation, automatic enrolment, relies on the power of inertia. Savers are highly unlikely to transition seamlessly from inert accumulators to active, informed consumers – there needs to be a bridge between these approaches.