There is no mistaking the popularity of the pension freedoms. The last set of government figures revealed more than £14bn has been flexibly withdrawn by 916,000 people since April 2015. Given that reporting of these figures was only made mandatory from April 2016 the true numbers will be significantly higher.
And savers’ appetite for accessing their retirement pots shows no signs of abating, with 40,000 more people using the freedoms in Q3 2017 versus the same three-month period in 2016.
There are eye-watering statistics around defined benefit (DB) pension transfers too. Analysis from Mercer (quoted in the Financial Times) claims an astonishing 220,000 people have given up their guaranteed pensions since the freedoms launched in favour of the flexibility and associated risk of the defined contribution world.
Such huge numbers have, perhaps understandably, been seized upon by some as the smoking gun of a future misselling scandal. Frank Field, the Labour MP for Birkenhead who chairs the influential Work and Pensions Committee, has already seen enough and wants the pension freedoms to be reined in.
While it’s crucial the freedoms are forensically scrutinised – and the Committee’s inquiry is an important part of this – these figures need to be placed in context.
When it comes to pension freedoms withdrawals, for example, it is sustainability that is the key. While we can’t draw firm conclusions based on the latest HMRC numbers, the average withdrawal per person in Q3 2017 was £8,030 – comfortably the lowest figure since the freedoms launched.
Source: HMRC
Context is also important when it comes to DB transfers. Although 220,000 is clearly a big number, there were 1.6 million active DB members and 7.8 million preserved DB entitlements held in old schemes in the private sector in 2015 (source: ONS). So while 220,000 might sound like a stampede, it is a small proportion of the potential DB transfer universe.
Furthermore, many of those transfers will have been made from small pots by individuals who had other income sources, while other people will simply prefer the flexibility – particularly around death benefits – offered by the defined contribution regime.
Of course many active and deferred members simply won’t have thought about transferring, perhaps because they are not yet close to the point at which they could access their DC pension if they did. But when it comes to how the pension freedoms are being used, it’s important the debate is informed by facts and not just driven by hyperbole.
The engagement gap
That is not to say there are not areas of potential concern, however. In an attempt to broaden the pension freedoms debate, AJ Bell surveyed 250 British adults who have started taking flexible withdrawals from their pension since 6 April 2015. This research looks not just at the raw numbers, but also how savers who have accessed their pensions feel about retirement.
The research suggests the growing demand for the pension freedoms has been driven primarily by people wanting control over their retirement savings, with half the people questioned (52%) giving this as a reason for not purchasing an annuity.
The poor value perceived in annuities is also a major contributing factor, although this was a distant second with only 30% of people citing it as a factor.
The good news is the vast majority of respondents (78%) said they felt in control of their retirement income. Coupled with the fact average per person withdrawals are falling, this does not suggest a market where the majority are using the freedoms irresponsibly.
However, the risks that come with remaining invested in retirement are clearly weighing on many people’s minds, with almost half (46%) of respondents saying they worry about running out of money.
This angst is not helped by the fact that many people do not understand some fundamental elements of their pension savings. For example, over half (53%) of those questioned don’t know how their pension fund is invested and a quarter (26%) never review the amount they are withdrawing.
The lack of knowledge of death benefits was equally striking. Only 4% of people questioned correctly identified that payments would be tax-free if they die before age 75 and subject to income tax on the beneficiary if they die post-75.
A majority (58%) admitted outright that they don’t know while some others thought it would be subject to the main forms of taxation such as income tax (10%) or inheritance tax (14%). The remaining 11% thought it would be tax-free.
Clearly, for advised clients, this lack of engagement might be less of an issue (the adviser is after all paid in part for their knowledge of such matters).
But given large swathes of savers are accessing their pension on a non-advised basis, it would be a huge positive if Frank Field and his colleagues consider not just the headline numbers but also ways to encourage people to take an interest in their retirement.
Furthermore, I suspect anyone who takes a keen interest in their pension will quickly realise regulated financial advice is a worthwhile investment.
Tom Selby is senior analyst at AJ Bell
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