Pension Options and Protection
Gaping holes in pension protection at retirement: The Work and Pensions Select Committee has just released its latest Report looking at how the new pension freedoms are working. Its conclusions expose gaping holes in the protections for people at the point of retirement.
Customers left at the mercy of their provider: MPs highlight the lack of innovation, even three years after freedoms were announced, with customers having little choice of new products and too often being left at the mercy of their provider, who may not have good value, low cost options for their retirement income.
Many withdraw pension money and lose tax benefits of pensions: It is good news that fewer people are buying annuities as soon as they reach their late 50s or early 60s, when still relatively young. However, it is worrying that many just take their tax-free cash as soon as they can and withdraw the rest of their fund and put it into bank accounts of Cash ISAs, which means they lose the tax and capital growth benefits of pension products. This reinforces concerns that people are not getting the financial guidance and advice they need, to help them make suitable retirement income choices.
Free guidance can help, but take-up too low: Ensuring more people are automatically offered the free, impartial financial guidance from PensionWise before taking money out of their pensions would be a significant step forward to helping people make better use of their hard-earned pension savings. PensionWise has customer satisfaction ratings over 90%, but too few people are using it.
Independent financial advice can save people money and avoid costly mistakes: It is also important to help people understand the value of taking independent financial advice, once they have had their free guidance session. Using independent, properly qualified financial advisers can find the best value products and help manage investments wisely through later life, has been shown to increase retirement incomes, help people find the right products for their needs and avoid making poor choices.
Pension providers have failed to develop good new products: The WPSC Report criticises the industry for failing to innovate and highlights the lack of competitive pressure on providers. It is particularly worrying that customers who leave the remainder of their fund invested, after taking their tax-free cash, just take the drawdown policy offered by their existing provider, regardless of cost, whereas shopping around for lower cost options could give them better income.
Industry needs to develop good value standard drawdown options: Given the lack of competition, providers have not felt pressure to innovate at the withdrawal phase of pension saving. They have stuck to the old drawdown products, which are often expensive and require customers to choose their own investments. The Committee is right to recommend providers should design good value standardised options, for those who cannot or do not wish to choose for themselves. Of course, in an ideal world, one would want everyone to make their own choices, but investment and pensions are complicated concepts and having a recommended pathway can help people manage their money more effectively through their later years.
Government has focused only on accumulation phase, need Independent Governance Committees to oversee value for money in decumulation too: The Government has already introduced controls on the fees charged for the standard (so-called ‘default’ – not a good word!) options for the period when people are building up their pensions and also required pension providers to set up Independent Governance Committees. The maximum annual charge is capped at 0.75%. But there are no limits on the charges for the withdrawal products and no requirement for standard (‘default’) options. The Committee calls for these to be introduced within one year.
NEST should be allowed to compete in the drawdown market: Currently, the Government’s auto-enrolment pension provider – NEST – is not even allowed to offer products for its customers to use at retirement. Most of its five million savers just assume they can get their retirement income from NEST, but they are forced to move their funds to another firm if they want to withdraw only part of their money. This clearly reduces the competitive pressure on other providers, since they have a ready source of new customers and no competition in the withdrawal market. Allowing NEST to introduce its own standardised drawdown products by April 2019, with controls on the charges, would force more firms to innovate, or face losing customers to NEST’s better value options.
Market is crying out for good innovative decumulation options – e.g. 4% annual withdrawal: So far it’s the same old drawdown or annuity choice, or just take the cash, which does not serve everyone well. Ideally, people need a good financial adviser, but if they don’t have one then offering a standard ‘default’ option which has, say, an income target of 4% of capital each year, could provide a better decumulation profile. People in their late 50s or early 60s can still have an investment time horizon of 20 or 30+ years, so using equities as well as bond, or investing in high yield assets can allow people to draw income, while still leaving opportunities for capital gain. Yet many people are steered away from so-called ‘risky’ options or err on the side of reckless conservatism.
Drawdown options could also include insurance or funds to help with care: Some options might include opportunities for covering care needs, some may include advanced life deferred annuities – but they do need proper transparency on costs and simpler options should have charge caps, just as is the case in the accumulation stage.
Standardised forms, simplified wording, independent Pensions Dashboard are all vital: The Committee also rightly highlights the urgent need to simplify pension customer communications. The current ‘wake-up’ packs, with reams of paperwork, using complex jargon, are not fit for purpose. It is essential that Regulators require providers to give customers simplified information, on one piece of paper, to help them see what their pension savings are worth and what options they have, with clear explanations of charges and recommendations to take guidance or advice. Having a standardised form of wording will also help development of a single Pensions Dashboard, to ensure people can see all their pension savings in one place. The Dashboard must be provided by one independent source, rather than having a few providers each trying to produce their own version which would confuse customers and distort the market.