The ABI recently issued a paper called ‘Five years on: Future-proofing the freedoms’, which gives an interesting, albeit concerning, overview of how the retirement landscape has been revolutionised.
I am supportive of the Pension Freedoms in general; the old regimes were way too restrictive given the way people now live their lives.
There are some who retire in stages and others who even return to work. However, it has become clear that there is a big gap in the advice process. The Pension Freedoms would be ideal if there were no such things as scams, and if everyone could get good quality financial advice, and then follow it. But we aren’t there yet, so many people now will be unsupported when making crucial life-changing decisions.
The report says that “the most recent data shows that full withdrawals had increased to the highest level since the reforms, particularly among those age 55-64; and four in ten flexible income withdrawals were at an unsustainable annual rate of 8% and over.”
This is a major concern for me.
Those who are well advised will either use other assets first in retirement and/or take sustainable income levels to protect themselves from excessive tax in life and after their death.
However, the Pension Freedoms make it too easy to access income that is in excess of the amount needed, giving rise to possible shortages later in life.
Taking too much income isn’t the only issue, it is the way in which this income is taken and the options available in pension schemes. Many schemes don’t offer full access to the Pension Freedoms, leading members to either take the options available, which may not be suitable or transfer to another provider.
Support is the key to ensuring a good retirement using the Pension Freedoms, as well as simplicity. Currently we are lacking both.
Pension savings are complex, and I don’t just mean understanding tax relief. For many, taking benefits is even more complex because it isn’t a single one-time-only decision. Those in retirement need ongoing advice to determine the right course of action as they progress through different life stages. Pension guidance at the start of retirement is good, but more is needed to help those in need throughout their retirement.
We need to ensure that Pension Freedoms are used in the right way, even by those unwilling or unable to pay for advice. If the Pension Freedoms are seen to be having a negative impact on retirement outcomes, we could see restrictions being introduced again which, in my opinion, would be a backwards step.
Claire Trott is chair of the Association of Member-Directed Pension Schemes and head of pensions strategy, St James’s Place Group