In its response to the work and pension committee's report, Protecting pension savers—five years on from the Pension Freedoms: Accessing pension savings report, the government said it shares the committee’s desire to see increased take up of the free guidance through Pension Wise, however argued it does not wish to “compel those who do not wish or may not need to receive guidance”.
It said the stronger nudge to pension guidance will ensure that individuals in scope will not be able to access their defined contribution pension savings unless they either receive Pension Wise guidance or express a firm and clear preference to opt out of guidance.
It also allows schemes to offer to book members an appointment at the earliest point possible, before they have made a final decision about access.
“We believe this approach gives strong encouragement towards those who may benefit from guidance to take up the offer of a Pension Wise appointment before accessing their defined contribution (DC) pension savings,” it said.
“We do not believe that it is appropriate to set a target figure for Pension Wise uptake, as we believe the decision to take up guidance is a personal one, which is affected by a variety of individual circumstances. We also do not support the trial of a system by which members are automatically booked a Pension Wise appointment.”
The government said the decision to use advice or guidance will depend upon individuals’ circumstances and should be understood within context.
It could be affected by an individual’s levels of financial literacy, other sources of information and guidance they may have utilised, and the makeup of their pension savings.
“We are committed to ensuring individuals have the support and information they need to make informed choices about their financial futures, striking the right balance between providing vital protections for pension savers, while also giving them freedom and choice over how they use their hard-earned savings,” it said.
Alongside the cost concerns, the government argued that it believes this intervention risks driving members towards pension guidance that may be inappropriate for them and risks further disengagement with guidance services.
Stephen Timms, chairperson of the work and pensions committee, said: “We welcome the government’s commitment to take forward work on many of the important issues we raised – for example, to extend collective defined contribution schemes and improve the data we have on what individual savers are doing.
"We remain concerned however that, without an ambitious target, take-up of Pension Wise will continue to be low. The government has rejected the committee’s recommendation for trials of automatic Pension Wise appointments, deciding instead to proceed with its ‘stronger nudge’, which the committee did not think would be enough to make receiving pensions guidance the norm. Ministers must now set out plans to monitor the impact of the stronger nudge, what they think will count as success, and set a timeline for review.”
Tom Selby, head of retirement policy at AJ Bell, said ensuring people have access to support, guidance and regulated advice throughout their retirement savings is critically important but the idea that people should be automatically enrolled into these appointments came with huge risks.
"Not least that it would cause costs to balloon and potentially create a spate of delays, cancellations and complaints if it wasn’t something the customer wanted," he said.
Selby argued that while its important to acknowledge that official guidance is extremely valuable, it is just one source of information for people saving, approaching retirement or taking an income.
Although the government stated it does not support setting a goal for the use of Pension Wise and paid-for advice when accessing pots for the first time, it is encouraging the Money and Pensions Service to evolve the service to innovate and achieve better outcomes in light of Tom McPhail’s 2021 Departmental Review.
In 2020/21, 55 per cent of pension pots accessed within the contract-based market, excluding those worth less than £10,000, were accessed after the use of Pension Wise or financial advice.
From June 1, 2022, new regulations implementing a stronger nudge to pensions guidance will be in force and require pension schemes to offer to book a Pension Wise appointment on behalf of the member when they seek to access, or transfer with the intention of accessing, their defined contribution benefits.
The government said trials showed this will further increase the take up of Pension Wise guidance.
Elsewhere, the Financial Conduct Authority are also bringing in corresponding rules implementing a stronger nudge to pensions guidance in the contract-based market.
Selby said rather than “myopically focusing on official guidance”, it makes sense to look more broadly not only at the different organisations that can help people make informed decision, but also when that guidance is provided.
“As part of this – and to support the introduction of the FCA’s Consumer Duty – policymakers need to provide greater certainty for firms over the advice/guidance boundary,” he added.
“Most providers working with non-advised customers want to provide extra help and support to savers but are restricted by fears of straying over the line into providing advice. If the FCA and government could deliver more clarity in this area then outcomes for savers could undoubtedly be improved.”
Tax-free cash decoupling
One of the recommendations to the regulator and government was to carry out a scoping exercise to establish the research and testing which could be undertaken on decoupling the 25 per cent of a pension pot which is tax free from the rest of the pot.
Under current pension rules, people can take up to 25 per cent of their pension as a tax-free lump sum with income tax being payable on the remaining 75 per cent.
However, the government said the Pension Commencement Lump Sum (PCLS) forms part of tax policy and any changes are for the government to consider, rather than the regulators.
It said the overriding objective in providing generous tax relief for individuals to build up pension savings is to enable them to benefit from an income in retirement.
“This tax relief cost the government £61bn in 2019–20. Decoupling the 25 per cent tax-free lump sum may encourage members to access their lump sum earlier than they would do otherwise and without seeking advice on the best approach to ensuring that their pension provision is sufficient for their retirement.
“In principle, it is unlikely to be in the individual’s long term financial interests to take out their PCLS before they need to access their pension for the purposes of providing income for retirement. For this reason, the government does not believe that it is appropriate to make changes to tax policy to make it easier for individuals to do so.”
The government said there are also potentially significant policy and practical issues with separating a member’s PCLS from the taxed portion of their pension pot.
It would require major changes to pension tax legislation and will bring a level of complexity.
“Such complexity is unlikely to be welcomed by consumers or the industry,” it said. “In addition, in order to ensure that the member has not taken more than 25 per cent of their pension pot or their lifetime allowance, decoupling the tax-free amount would impose additional requirements on scheme administrators to maintain records of how much had been claimed by the member.
“Further, it would likely make it more complex for the member to understand and predict their tax position in future and risks making the system more difficult for members to navigate.”
The government said it is concerned that individuals may see their retirement outcomes negatively impacted if they choose to access their PCLS early without taking informed decisions relating to the remainder of their pension pot.
For this reason, the government wants to understand what issues exist in relation to how occupational pension scheme members access their pensions and will therefore be issuing a call for evidence in May 2022.
Selby said the idea that the decision to take your pensions tax-free cash should be ‘decoupled’ from choosing a retirement income route “felt like a solution to a non-existent problem”.
“The reality is that most people enter drawdown when they take their tax-free cash, meaning their options remain open,” he said. “In fact, in many cases – particularly where the individual is not taking a retirement income – there might be no change to their investments at all.
“Given this fact, combined with concerns people might be encouraged to access their tax-free cash earlier, it is no surprise the government has chosen not to pursue reform.”
sonia.rach@ft.com
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