Pensions freedom and choice, first announced in the 2014 Budget, certainly took the industry by surprise. Chancellor George Osborne kept his cards close to his chest before the big reveal that gave the industry about 12 months to get on top of the changes.
And while the majority of industry commentators welcome the changes, which opened up retirement income choices to the masses and removed effectively compulsory annuitisation, concerns about its breakneck implementation remain.
Here, industry experts reveal their biggest concerns post-6 April.
Talbot and Muir head of technical support Claire Trott thinks people could be left “disillusioned” once they find out their real, probably limited, options.
“My biggest concern about the pension reforms is the fact that many people who have been led to believe that they have all these freedoms will be disillusioned by their actual lack of options. We all know that word of mouth has a greater impact on the view of the general public than anything we as an industry tell them.”
She explained: “Many schemes will not only be unable – or even unwilling – to offer the pensions freedoms, but will also restrict the death benefit options because of this. The fact that people will not be able to access the options and they will need to transfer to a new scheme (which could cost them money and will cost them time) will take some of the shine off their newfound access.
“When people discover these issues, they are likely to be very vocal; and all the good feelings brought about by the changes
will be washed away, and we
will be back to the negative feeling that has long plagued the pensions industry.”
Beating the vultures
Dentons pensions management director of technical services Martin Tilley raised concerns about “circling vultures” preying on cash-rich retirees.
He told RP: “My greatest concern is that circling vultures who prey upon individuals – who now for possibly the first time will have access to what could be a substantial amount of money – will trick these individuals into inappropriate investment schemes.
“While guidance will be available from Pension Wise, little (if any) of this focuses on investment either regulated or non-regulated post-flexi-access withdrawal.
“Once monies are in the individual’s hands, there is no regulated or advice-giving body between the individual and unregulated investment promoters and their unregulated investment products.”
Tilley cited landbanking, carbon credits and off-plan hotel resorts as examples of how inappropriate high-risk or scam investments have previously been pushed to self-invested personal pension savers.
“But with that door closed, withdrawn pension cash is the next logical target. The worry is that individuals will be persuaded to withdraw their pension cash to make these investments; and when it is lost, the individual will have nothing at all to fall back on,” warned Tilley.
Intelligent Pensions technical director David Trenner fears negative press headlines when people are not able to get their hands on their money immediately.
“Although I have concerns about people making the wrong decisions, my greatest concern is that people are just assuming they will be able to cash in their pension funds on 6 April. And when they are unable to do so, this could give rise to negative press and negative perceptions of the pensions industry.
“People heard George Osborne’s Budget speech last year – or they subsequently read about it – and they did not hear him say anything about the need to amend scheme documentation to permit the new freedoms. They did not hear him say that the legislation would not be in place until shortly before 6 April 2015, or that there would be safeguards which could add delays.
“I have already had an email from a client asking me to explain why a pensions administrator can tell him that he cannot do something that the law says he can do – and this was an administrator who said that they would implement the new rules in the next six months!”
He added: “No one is attempting to manage expectations for those customers who have decided without advice to take their funds as cash and sadly, I cannot see anyone that they might listen to doing so. The new pension freedoms provide unlimited flexibility and this will undoubtedly lead to accelerated, and in some instances, total withdrawal of an individual’s pension savings.
“While this irreversible swap of future income for immediate ‘spendability’ will be wrong for many, at least they will have had some values worth from the taxed funds withdrawn.”
Suffolk Life head of marketing and proposition Greg Kingston can see trouble further down
the line, specifically the next general election.
“Perhaps the most significant threat to pensions freedom (and pensions themselves) comes not on 6 April, but on 7 May and the subsequent following five years. It is acknowledged that there will be a rush of pension withdrawals post-April.
“However, further tinkering and meddling by the next government will risk devaluing the overriding purpose of a pension – to encourage saving to provide sustainable retirement income – and create a new acceptable behaviour of reducing saving to minimal levels, working towards a withdrawal event at the earliest age possible.
“Through constant and accelerating change, pensions have become overwhelmingly complex. The scheme, rules and conditions under which the ordinary saver contracts to start their pension saving become unrecognisable by the time they start drawing their cash out, leading to a lack of confidence to save and irrationally poor engagement.”
He added: “I struggle to think of a form of saving where the saver is as remote from and disengaged with their own savings, their own money and their own future financial security as with a pension. It is a damning situation, given the inherent benefits and flexibility of pension saving.
“That situation can be slowly repaired and the current reforms are a perfect catalyst. The next government, and all working in the industry, have a huge responsibility to make sure that it happens.”
‘Think before you act’
Mattioli Woods senior consultant Karena Woodall wants retirees to take their time and think before they act: “The phrase ‘For fools rush in where angels fear to tread’ does come to mind when considering pensions freedom; the concern is that those less cautious will rush in to access pensions freedoms, taking advantage of the spoils with no thought to both the short and long-term consequences of their actions.
“The irony being that those with pension pots big enough to fully encash and buy that elusive Lamborghini are the ones who are likely to be both more prudent and most likely to have professional advisers overlooking their pensions and wider financial planning.”
Woodall pointed out it has been nine years since A-Day and there has been a succession of pension alterations, which she said kept advisers on their toes, but did nothing to help with consumer apathy or mistrust.
“A door has been opened and the fear is that too many people will be quick to rush to freedoms with qualms about the longevity of the offer,” she said. “But like Winnie the Pooh eating excessive pots of honey, just because it’s available to you, it is not going to stop you getting stuck in a rabbit hole and then needing help to get out.”
MoretoSIPPs principal John Moret, also known as Mr SIPP, has spent more than 40 years working in pensions. He is worried the pensions ‘brand’ could suffer irreparable and “possibly terminal” damage.
“The scale of the reforms is so great and the speed of implementation so rapid that some things are bound to go wrong – or at least not work as well as they might.
Moret has other, more specific concerns. “Using the ‘four stages of competence’ model, the obvious worry is the ‘unconsciously incompetent investor’. I reckon at least a third of all those investors potentially able to use the new freedoms are in this category.
“Another 50% will be ‘consciously incompetent’. They are the targets for the Pension Wise service or advice. Maybe one in ten are ‘consciously competent’ and a very small minority will be ‘unconsciously competent’.”
Below, Moret outlines his other big concerns about pensions freedom.
John Moret’s four biggest fears
My main worries here are around the wide range of preparedness among providers – and as a result, the hugely differing levels of customer experience. Many customers will have pensions with a number of providers and will experience first hand the differing service levels – and costs – which will be a source of great frustration.
I find the proliferation of new funds designed for income drawdown alarming and a potential cause of much confusion for investors. The value of many of these new offerings seems highly dubious – and of course, we’ve not really seen any new products yet targeted at this market.
3. Political uncertainty
Probably my biggest risk. I simply don’t see all these reforms lasting the course of the next parliament. I certainly think the death benefit provisions are under threat and we can be fairly sure that pension tax reliefs will also be reduced. Add in the current ideas around the “second hand annuities” market and unfortunately I see pensions becoming a political football once again.
The income tax implications have been covered in some detail – but the inheritance tax and estate planning consequences are profound and complex. Many wealthier investors will probably be better advised not to cash in their pension and use other assets. But I fear that all the hype will lead to some expensive mistakes, which will benefit the Exchequer.