Jonathan Stapleton takes a look at how employers can help their members through the at-retirement journey and ensure they are getting the right support to make decisions.
Pension freedoms came into force in April 2015. Within three months of the policy being implemented, more than £2.5bn of payments had been made to pension customers - either as cash lump sums or drawdown payments.
Latest data from the Financial Conduct Authority shows that, in the third quarter of last year, 145,068 pension pots were accessed by consumers for the first time either to take an income or withdraw their money as cash.
Of these, there were 79,916 full cash withdrawals by new customers; 41,067 new drawdown policies were entered into and not fully withdrawn; and 20,538 annuities were purchased.
Indeed full cash withdrawals have been consistently popular among consumers, with 65,610 occurring in Q4 of 2015, 62,298 happening in Q1 of 2016 and 88,849 in Q2.
It is clear the freedoms are being used but there is a growing concern that individuals are not making the right decisions at retirement as they have insufficient support.
Centre for Policy Studies research fellow Michael Johnson believes that the government has overlooked the need to protect both the state and individuals from the downside risks of the pension freedoms.
In a CPS paper published in March, Johnson says: "The concern is that from the age of 55, some people will inevitably make poor financial decisions that could put them into pensioner penury, perhaps to then fall back on the state for support."
Johnson believes this is particularly problematic when it comes to auto-enrolment. His solution is a system of auto-protection with two distinct components - auto-drawdown at private pension age in the form of an income drawdown default of between 4% and 6% of pot assets, per annum; and auto-annuitisation of residual pots at the age of 80, a move he believes would facilitate the collective hedging of individuals' exposure to the unquantifiable risks of longevity and remove later-life exposure to investment markets risks and, through indexation, cost of living inflation.
He says: "To be clear, everyone should be free to opt out of one or both phases of auto-protection to pursue alternatives, consistent with 2015's liberalisations. There is no desire to prevent people from doing what they want with their own savings.
"The introduction of auto-protection would address a major policy inconsistency, whereby the state nudges and incentivises people to accumulate retirement savings, only to desert them at the start of decumulation."
Yet, while Johnson's proposed approach is a solution that may gain traction in the future, it does not help the employers running schemes today - and an increasing number believe employers and schemes need to do more for members than simply signposting them to the government's guidance body, Pensions Wise.
Wealth at Work director Jonathan Watts-Lay says: "One of the things that we are finding is that people don't really understand the full flexibilities of freedom and choice and how to optimise their income. The bit that most people have got is that it is their money and they can do whatever they want with it - they understand the high level principle, which is great, but the devil is in the detail."
He adds that most people retiring today probably have a mix of both defined benefit (DB) and DC pension provision and may well have other savings as well - meaning they have to decide where they take income from first and how to do this in the most tax efficient way. Watts-Lay says: "Right now, the problem is that employees tend not to know how to calibrate the taking of income from their various asset pots."
He says one particular problem is basic rate taxpayers cashing in small pots all in one go - making them a higher rate taxpayer for that tax year and meaning they have to pay substantially more in tax than they need to. It is issues like these that Watts-Lay believes are leading an increasing number of employers and trustees to implement financial education, at-retirement and advisory programmes of their own to help their members make better decisions.
Access to support
Jeanette Makings, head of financial education at Close Brothers, agrees that employers should be providing members with support - but says what that support looks like will differ and can range from producing a retirement pack, to retirement seminars and providing access to advice.
But she believes advice will become increasingly important and thinks employers should provide access to such advice as services such as Pensions Wise, while being a "great first-stop facility" would not provide everything people need.
She says: "To make the best choices now, many more people will be needing advice than ever before so employers should make sure that people who are retiring have access to advice should they wish to take it and haven't already got an adviser in place."
Makings also says there are a lot of things employers can do to help in this space that wouldn't necessarily cost a lot of money.
She says: "There is an assumption that putting people on retirement programmes or having retirement programmes for your own staff is exorbitantly expensive but it doesn't need to be expensive and there are quite a few providers that provide public programmes for companies that maybe only have one retiree a year. This doesn't have to be a huge cost.
"Such courses can give employers huge peace of mind that they are giving people access to significant amounts of support and help and they can rest assured that those people are going to be making a better informed decision."
HMRC's latest pension freedom statistics show that over 500,000 people have withdrawn a total of £9.2bn from their pensions using the flexible rules since April 2015, with an average of three payments per person.
Latest research from Retirement Advantage among some 250 over 55s who have used the freedoms to access their pensions flexibly show how people are using this money:• 28% spent the cash on home improvements
• 26% put the money in a savings account, while 19% invested the money elsewhere
• 19% went on holiday
• 13% bought a new car
• 12% paid off the mortgage or other debts
The Retirement Advantage research also revealed that 37% of people using the freedoms to access cash from their pensions have continued to pay into a pension, while 19% say their employer has.
Worryingly, the survey found 67% of these people are completely unaware of the Money Purchase Annual Allowance (MPAA).
Retirement Advantage pensions technical director Andrew Tully explains: "I doubt many Lamborghinis have been bought with the cash, but taking money out of a tax efficient pension to simply reinvest or put in a savings account, having paid tax on some or all of it, is a little mad.
"Perhaps of more concern are the number of people who continue to work and pay into a pension, but are unaware of the money purchase annual allowance. This is likely to catch many out when the limit drops to £4,000 from 6 April this year."
Indeed, many schemes are already developing their retirement offerings
B&CE has developed a four stage at-retirement process within its master trust, The People's Pension.
The scheme firstly flags the government's Pension Wise guidance service extensively. In addition to this the scheme also has its own communications materials, which explain to people the options they have at retirement The third strand of the scheme's approach is to urge those members who have complex financial affairs to speak to a financial adviser.
However, it also recognises that traditional financial advice may not be affordable for many members, so it is has also partnered with LV= to provide its members with the option of additional guidance or advice.
Members of The People's Pension can use the LV= Retirement Wizard to get a guidance report, giving them a quick overview of the options open to them.
Scheme members can also use the LV= Retirement Wizard advisory service, which following completion of a digital fact find for free, will provide a full regulated advisory report. They can obtain the report for £49, and can also implement those recommendations through the LV= platform if they choose to.
Importantly, however, the system does not rely on robo-advice - and human advisors will intervene with telephone follow ups for members who, for instance, have guarantees on some of their other pension schemes or have defined benefit scheme benefits as well.
B&CE director of policy and market engagement Darren Philp said that while this approach would not replace traditional full advice, it would provide a good value service to members.
He says: "We believe this is a really cost-effective way of giving people what they need."
Growing numbers of defined benefit pension scheme members are looking to transfer to DC schemes following the introduction of freedom and choice reforms and the recent rises in the transfer values on offer.
According to research from Willis Towers Watson, 55% of the DB members who spoke to a financial adviser last year chose to transfer out of their DB schemes to access the flexibilities. This is significantly higher than the previous year's take-up, when just over one-third (36%) opted to transfer.
The consultant said 43% of those who transferred over the last year bought an annuity, 4% took their funds as cash and 54% chose to take their funds over time through drawdown or a combination of drawdown and other options. It also found that members with transfer values over £500,000 are almost twice as likely to transfer out of their DB schemes than those with transfer values under £100,000.
Financial advisers are also expecting client enquiries about DB to DC transfers to increase over the next 12 months, with 19% of those responding to a survey by Investec Wealth & Investment expecting a "significant" increase. In contrast, just 2% expect a fall in enquires.
However it found that many advisers were declining to provide DB transfer advice - with 71% of those that were refusing to provide such advice saying the risks of doing so were too high.
Others said the process was too complex, that clients were "resistant" to paying appropriate fees and 45% cited a perceived lack of regulatory support.
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