As the pension freedoms approach their third anniversary, advisers are reflecting on how the watershed policy has affected both their businesses and their clients.
Clients have benefited from being able to access flexible drawdown and to use their pension to help fund inheritance. They are able to transfer out of defined benefit schemes and are taking advantage of more holistic financial planning.
However, advisers disagree on how radical the freedoms have been and how their effect will ultimately be judged.
Some argue that any advantages are overstated because the majority of savers do not benefit from the freedoms because of the advice gap, while regulations on transfers and products are outdated.
Here, Money Marketing talks to advisers and pensions experts to get their thoughts on the impact the pension freedoms have had to date.
The story so far
Market data the FCA collected between April and September 2017 shows just 53 per cent of total annuity purchases, approximately 19,000 plans, were made by existing customers, a 7 per cent decrease on the same period last year.
However, the proportion of annuity sales made to new customers or in single and multi-firm third party arrangements saw a 7 per cent increase to 47 per cent.
Meanwhile, fewer savers are turning to an adviser before fully cashing out their pensions. Between April and September 2017, just 32 per cent of full withdrawals were advised, down from 44 per cent the previous year.
Nearly all 95 per cent of the decline in advice was attributed to cash outs for pots under £30,000. These figures relate to advisers benefiting from the freedoms, but have clients benefited from the same positive impact?
According to Aegon’s customer and consumer panel, they have. Results from a December survey show 72 per cent of the 874 adults polled believe the freedoms have helped people make the transition into retirement. Only a quarter of those surveyed said they would be in favour of increasing the age at which they can access their pension to beyond 55.
Positives and negatives
Red Circle director Darren Cooke says the freedoms have been positive in several ways.
He says: “The freedoms have encouraged more people to save into pensions as they feel more in control of their money. People talk about it being a tax-raising exercise for HM Revenue and Customs but I know people who have paid into a pension for the first time using carry-forward rules and those payments have been significant.
“Also drawdown is popular as people are more confident they are in control of their pot. In my experience, people have withdrawn for legitimate financial reasons and have not been irresponsible.”
Cooke adds: “Finally, there is the inheritance tax angle, with people funding inheritance through pensions, but that could change. Overall I am positive about the pension freedoms.”
What about concerns that the reforms have created new opportunities for scammers, particularly in the area of transfers?
Cooke says: “Some transfers have been done incorrectly, but what is surprising here is the FCA. It’s taking a long time to update the old rules on transfers. So there is a disconnect between the old set of rules and the new world.
“Scams existed before pension freedoms and one angle that has been taken away from scammers is pension liberation, because people know they can get money at 55. I am not aware of a pension liberation scam running at the moment.”
While Cooke is mostly upbeat, not all advisers are similarly positive. HC Wealth Management director John Abraham remembers the Pensions Review of 1994.
Then, the industry regulator, the Securities and Investment Board, ordered a review of sales of personal pension policies (both regular premium and transfer policies) taken out between 29 April 1988 and 30 June 1994.
Abraham says there are echoes of what happened then and at British Steel now: “I was working at a small firm where the turnover was £1m annually. We were asked by the regulator to review all our transfer work, and the administration of this cost £250,000. In the end the firm paid £40,000 in compensation for the transfer work done.
“Now the FCA is contacting all the firms involved in transfers. The misselling scandal then involved miners, and now we have steelworkers. Anyone who was around 25 years ago will have a red light going off in their heads.”
Abraham argues it would be wise to learn from history: “Many advisers have forgotten the lessons from the past, and were probably not involved in the original pension transfer review.
“People are being blinded by the transfer value, which is twice the value of the client’s house – which does not automatically mean transferring into a DC plan is a good idea.
“Also, we have been through an extended bull market, and this means people have forgotten that funds can take a hit from time to time.”
Aegon pensions director Steven Cameron says things are not as bleak as Abraham makes out.
He says: “I can sympathise with anyone who has been through the pensions review as it would scar them for life, but the circumstances were different. The Government encouraged people to leave final salary schemes and it happened to people who could still accrue future benefits.
“Also, there was not the level of regulation and professionalism advisers have now.”
Cameron adds: “It appears there have been isolated instances of poor practice, but that should not be generalised.
“We need to have the confidence to draw the line under any recent poor practice and move forward with the support of the media, politicians and regulators.”
Cameron is interested to see how advisers develop propositions that appeal to clients they have not served before.
He adds: “One of the things I’m intrigued by is if we see investors who entered drawdown without advice might now seek advice to ensure they don’t run out of money. Is there an opportunity for specific advice in this area?”
Hymans Robertson head of research Stephen Birch at expects increasing competition from different players in the adviser market.
He says: “One challenge that has emerged is the advice gap for people with pot sizes ranging from £50,000 to £500,000.
“Here we might see Nutmeg-like start-ups that create solutions for pensions instead of Isas, and focus on retirement planning rather than an investment solution.”
Birch adds: “Start-ups will create non-advised robo solutions or digital answers, and these will compete with more established solutions from the workplace and life insurance firms.”