Will the Pensions Freedom Genie Need be squeezed back in the bottle after all?

11 June 2015

Even before Pension Freedoms officially went live just over two months ago on Freedom Day, many industry detractors said it would not work as too many people would be tempted to cash in their retirement savings and consequently run out of money way before they actually pass away. Desperate retirees heading for destitution in their old age would blame the adviser or provider for allowing them to exercise these new freedoms and set up thousands upon thousands of Pension freedom-related mis-selling allegations. Well the voices of detraction, or at least caution, have if anything been getting louder since 6th April. So much so their decibel level may soon match those still clambering enthusiastically to offer retirement choices for all.

Part of the problem, to put it crudely, is that we are not very good at predicting when we will die. Therefore trying to make a lump sum last decades after we draw it down, without knowing when we will need to stop drawing down on that pot, is a massive challenge. After all, according to the Office of National Statistics a 65-year old male today has a 25% chance of reaching 94 and women of the same age have the same odds of making it to 97 now. That’s a mighty long retirement unless we are all going to work into our dotage. So the chances of a cash lump sum, perhaps taken instead of buying an annuity, lasting over 30 years (as the only source of reliable retirement income) is very slim indeed.

In the pre-Pensions Freedom world where annuity purchase was compulsory, that risk was passed over to a life assurance firm with its army of actuaries assessing when we would pop our clogs. They took the emotion out of it and injected some serious maths instead. Those that lived longer than predicted did better out of the deal while those that died young did not.

But in the pension freedoms world that risk decision-making is passed over to the consumer, many of whom are likely to be ill-equipped to make the right call.

What is clear from events and reporting post-Freedom Day is that the whole industry – providers and advisers alike - are now very concerned about poor consumer outcomes emerging en masse a few years from now as withdrawn retirement funds run out. These concerns are expressing themselves in providers and advisers’ interactions with many consumers looking to exercise those freedoms in the last couple of months.

The Daily Mail already has a consumer campaign running on this matter with such lurid headlines as this week’s 6 fatal flaws strangling the pensions revolution. Reading these pieces, frankly does make you wonder whether George Osbourne libertarian ideology may have got the better of him.

The piece indicates that many consumers are being forced by providers to go to an IFA for full advice, despite the fact that the guaranteed guidance should be all that is necessary if funds being accessed are worth less than £30,000. And of course it’s a great shock to many consumers that they have to pay “£500 to £1000” to get that advice (blame RDR for that) and an even greater shock to find that they had to speak to several adviser firms before they can persuade one of them to sign off a decision that the consumer has clearly made alone.

The changes have been brought in too fast for the industry to handle the volume and range of withdrawals apparently being demanded of them, the piece indicates. Reading between the lines it’s clear that some providers are not able to offer UFPLS withdrawals yet. If you listen to the experts, UFPLS should be chosen over FADs only in rare circumstances anyway. The Mail piece also indicates that other providers aren’t able to let the customer move into FADs (or flexible drawdown as the piece says). The question is whether they can’t or won’t? The Minimum Income Requirement (MIR) of £12,000 per annum from specific income sources has been re-introduced for flexi-access drawdown just as it was for its predecessor Flexible Drawdown, so consumers already have that hurdle to cross.

And Steve Webb’s well-meaning idea of extending Pension Freedoms to existing annuitants through the option of re-sale of existing annuity policies also looks unworkable if you get into the detail of it.

Have a look at John Greenwood’s excellent Behind the Headlines interview with Jim Boyd, for a feeling that the Government may need to begin rowing back on some reforms, putting consumer safeguards in place similar to that which have been put in place in the US and Ireland for example.

Perhaps more revealing still is the FCA’ head of Risk and former principal policy adviser for the consumer protection body Which? Mick McAteer’s recent comments published in Corporate Adviser. This industry heavyweight details one emerging school of thought which believes that setting up an annuity re-sale market simply takes a bad system (which is already in the process of reforming itself) and replaces it with something much worse, particularly because it is being done so quickly.

Already there are noises about banning those on benefits from cashing in their annuities even before the option is due to take effect next April. Is this the start of a wave of consumer safeguards that will need to be put in place to temper Pension Freedoms? Will the Retirement Savings Freedom Genie be stuffed back in his bottle after all? Not if Ros Altmann and Harriet Baldwin have anything to do with it. The battle is joined.