Pensions freedom places great responsibility on individuals, many of whom will be less than familiar with the retirement income landscape. There is a lot for people to lose and much at stake.
The freedom and choice agenda is a seismic change in pension provision and from April people will be faced with a wide range of decisions to make. And when faced with a range of choices there is a risk that they will choose unwisely.
This isn’t to be a naysayer, as I broadly support the changes. But we must do what we can to protect people that have saved all their lives just to ruin it all in one bad decision.
The success of the flexibility and freedom of choice for all with their pension assets hinges on the quality of the guidance and advice that individuals receive.
Everyone in the industry can tell you that a form of generic guidance will be insufficient for the majority to make the right decision and will come down to chance without the correct appreciation of the risks.
With great power comes great responsibility
Without an appreciation of the risks, many will experience poor and disappointing outcomes. With flexibility and freedom comes a bewildering array of choice, complication, the opportunity for mis-selling and further devaluation of pension savings.
If the first step on the path to advice is guidance (albeit restricted to pensions assets), then this will give us the greater chance to see better outcomes for members.
However, for this to succeed, financial education needs to be increased at all levels. Employers should be encouraged (on a safe harbour basis) to provide financial education to all staff, from new joiners to those looking to leave and move into retirement.
Schools need to engage with charities such as MyBnk and the like to start the cultural change to financial literacy, knowledge and understanding across the board.
We must recall, and not forget, that drawdown was described just weeks before the 2014 Budget as a highly sophisticated product only suitable for wealthy investors.
Drawdown is complicated and a minefield for laypeople to address alone. With this, the prospect of pensioner penury is a very real one.
On the one hand, many people are naturally frugal and will overplay the downside risk, at the expense of the upside risk. This people may live on too little, opt for an annuity or keep what they have.
However, many will spend too fast too soon and run out of money and fall on the state. We should consider retaining an income requirement where a level of guaranteed income, a safety net remains, with full flexibility allowed for benefits in excess of this.
Hit the brake
So on balance, I believe that a brake should be applied to the flexibilities:
- Allow capped drawdown, to be entered into, as now, after April without triggering the money purchase annual allowance. People can then act flexibly within some constraint on the maximum they can withdraw
- Continue the minimum income requirement (MIR) for flexi-access drawdown at £12,000 per annum
- Continue with the small pots solution, indexed with the consumer price index so members with small funds can still receive these where the MIR is not reached and when buying an annuity is the wrong option
- Increase the minimum pension age to 60 (for flexible access) to prevent early depletion of funds.
From conversations across the industry, it appears their two broad camps exist: one in support of the full reach of the freedoms (with the clear upside for many); the other, (as I am) proposing a check to this trajectory, mindful of the potential for significant downsides… The debate will continue.
David Brooks is technical director at Broadstone