Jack Jones looks at research from TPR and the FCA on accessing pension freedoms
At a glance
- Most members will have to transfer to access the full range of pension freedoms
- Drawdown is the least common decumulation option in trust-based schemes
- Some contract-based members face exorbitant exit fees
Over the last few months regulators have been busy compiling facts and figures for the government's consultation on transfers and early exit charges. Both the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) published the results last week.
The research highlighted the problem HM Treasury is keen to address: many members of both contract and trust-based schemes will have to transfer out to access the full range of retirement income options. A minority will face hefty charges when they do.
TPR looked at 217 single-trust defined contribution (DC) schemes of varying sizes and nine master trusts. Its research found that just 14% gave members the full choice of decumulation options - withdrawal of tax free lump sum; uncrystallised fund pension lump sum (UFPLS ); drawdown; and lifetime annuity.
Most members (88%) are able to take their cash as an uncrystallised fund pension lump sum (UFPLS) while seven out of ten can take a tax-free lump sum. At the other end of the scale fewer than one in five members (18%) are in a scheme with an in-house drawdown option. Fewer than half of members (47%) can buy an annuity through their scheme or a tie-in arrangement.
Unsurprisingly, the largest single-trust schemes and the master trusts gave members the greatest range of options. But even within these groups, just over half of master trusts (56%), and less than a third of big occupational schemes (31%) offer drawdown.
TPR added the caveat, however, that some of the schemes taking part in its survey appeared to have not understood the questions asked. Otherwise the one in eight smaller schemes that said they had no decumulation options available would be particularly concerning.
The regulator also suggested that the young member profile of many of the schemes was a factor. Fewer than one in three had members who were over 55, and therefore eligible to access their pension pots.
TPR said: "One interpretation of this data is that the DC occupational market is still evolving as many members, due to their age, are not currently facing decumulation choices. This may explain why some schemes have reported that they do not yet offer new decumulation options."
But Barnett Waddingham senior consultant Malcolm McLean thinks the figures are encouraging. "It looks like schemes have responded well to this policy initiative," he says. "It was always envisaged that not all schemes would offer all the freedoms, and it is not surprising not many small schemes are offering the full range, but there seems to have been a real effort to give effect to these freedoms."
For those members that needed to transfer out to access their pension pot in the way they wanted, the regulator found most could do so without incurring charges. Just 11% of schemes, reprsenting 6% of members, said retirees would face charges to transfer out, or choose a decumulation option like UFPLS.
TPR said that in its experience many schemes let members make an initial withdrawal free of charge, while subsequent withdrawals would have a fee levied.
Over in the contract-based world the story was much the same. The FCA found there had been a surge in members accessing their pensions since the April changes. It said 204,581 pension pots had been accessed in the three months after regulations were relaxed, more than double the number in the same period in 2013.
While 80-90% could access their pot through drawdown or UFPLS, the FCA said in practice the majority of members were required to transfer to take their money in their preferred way.
It said: "While firms are continuing to develop new options for their customers, with many expected to be available within the next six months, we expect many consumers will continue to need to transfer to a new contract when accessing their pension savings."
But the watchdog found a significant minority of savers faced high charges to switch. While 84% of savers currently over 55 could switch schemes without incurring any charges, 9% would have to pay up to 2% of their pot. Some 4% would face charges of 2-5% while 3-4% would have to pay exit fees in excess of 5%.
McLean says this highlights the problem facing some savers in legacy schemes, but says very few new schemes would have anything like this level of charges.
But the FCA also found that many providers were wary of accepting transfers in. Most required consumers transferring from another provider to take advice which went beyond statutory requirements, particularly among the largest firms.
"Many consumers seeking to transfer their defined contribution pension would find that their transfers were not accepted by a significant number of providers, particularly where they wished to transfer safeguarded pensions," the FCA said.
Similarly, only a quarter of providers and only 15% of the largest 15 said that they would accept transfers from defined benefit pensions in all circumstances.
The Treasury's consultation on transfers and exit charges closes on 21 October.
More than half of BlackRock’s flagship UK defined contribution (DC) default fund’s assets will be invested in ESG strategies by June 2021.
The Pension Schemes Bill has completed its third reading, crossing its latest hurdle in the House of Commons.
An amendment to the Pensions Schemes Bill which would have seen people given a pre-booked Pension Wise appointment ahead of accessing their retirement savings has been defeated.
A proposal to ensure savers receive a Pension Wise appointment prior to accessing their retirement pot has received cross-party support in parliament, while Labour seeks net-zero pensions by 2050.
Pension scams are not just about the money lost, but the lives devastated, says Nicola Parish, so the industry must unite to defeat this scourge.