Thirty-six months is a short time in pensions. Before April 2015, few could have predicted that compulsory annuitisation would come to an end and the door to full withdrawals would be swung open.
As the pension freedoms reach their third birthday, it is worth weighing up the evidence to date. Let’s start with the good news: there aren’t fleets of Lamborghinis roaming the streets full of dishevelled pensioners who can’t afford to eat because of their gross exuberance. Instead of passively sitting in an annuity, savers in drawdown are suddenly a lot more engaged with what their provider and markets are doing.
It could have gone a lot worse. The reforms caught the entire industry off guard, which has led to wholesale changes in business models as annuity providers scramble to consolidate, and traditional life companies flog off their back books in search of higher returns in the asset management game.
The bad news is that many have only been prevented from taking their pot or buying an overly risky drawdown policy by their financial adviser. Still, not enough people are getting regulated advice. While Pension Wise and The Pensions Advisory Service continue to do an admirable job with guidance for retirees, they, and the Government, really do recognise there is a difference between what they are cut out to do and what needs the expert hand of a financial planner.
For what it’s worth, the FCA has done its absolute best to keep up with the tide. It has reviewed both advised and non-advised drawdown, closed book policies, default funds, defined benefit transfers and cash savings accounts and has collected a whole host of data to leave us better placed to judge consumer benefits and harm.
Many of the effects have been highly predictable: annuity sales down, drawdown sales up, plenty of people utilising their tax-free lump sums and then some. If you believe the ‘pension freedoms were specifically designed to increase tax revenue’ style arguments still floating around, then that was all part of the plan anyway. Or if you’re a big fan of personal financial freedom, that should not worry you at all.
But everyone should be concerned about the significant lack of shopping around and of seeking financial advice. More than half of all pension pots accessed since freedoms have been full cash withdrawals, but only around 35 per cent are getting advice on them. Half of those who took advice did not know their pension charges.
While advised clients are less likely to take out an annuity, they are also significantly less likely to withdraw all their cash at once. The pension freedoms may only be in their infancy, but the value of advice must be promoted to stop a tantrum later on.