Pension freedom guidance and advice Contents

1 Introduction

1.From April 2015, people aged 55 and over were given much greater freedom to choose how and when to access defined contribution pensions.1 In particular the requirement for most people to purchase an annuity, a financial product which provides a regular retirement income for life, was removed. Many more individuals now have a range of options, including income drawdown, whereby income is removed from a fund that remains invested, and taking a pension as cash. The reforms were widely welcomed.2

2.Many people find making financial decisions difficult and exhibit behavioural biases that may incline them towards inappropriate choices. We heard that people tend to:

These factors can leave people ill-equipped to make choices on how to use their pension savings. This problem may be exacerbated where decisions are complicated by tax, benefit or debt consequences.11

3.The difficulties consumers have in understanding financial products can result in a mismatch between buyers and sellers. The financial services industry has a recent record of taking advantage of this asymmetry in a string of mis-selling scandals.12 In itself, greater flexibility and choice in deciding how to use pension pots creates more complexity for consumers and increases the potential for them making poor decisions or being scammed.

4.The Government acknowledged the risks to consumers in choosing to establish Pension Wise, a free guidance service funded by an industry levy, to provide support to savers at the point at which they can access their pension pots.13 Pension Wise offers a one-off 45 minute guidance session in person (provided by Citizens Advice) or over the telephone (provided by The Pensions Advice Service, TPAS). It also publishes information on a website.14 The Financial Conduct Authority (FCA), the regulator of personal pension schemes and financial advice, also required pension providers to offer a “second line of defence” of retirement risk warnings before savers take decisions.15

5.Our predecessor Committee considered the pension freedom reforms shortly before their introduction in its March 2015 Report on Progress with automatic enrolment and pension reforms.16 The Committee welcomed the flexibilities in principle, but expressed concern that the consumer protections in place risked being inadequate.17 Our inquiry reconsidered the particular issue of guidance and advice in the light of six months’ experience of the new regime. We are grateful to everyone who participated, including those who commented on a forum about the inquiry.18

6.Our inquiry took place against the backdrop of generally positive early news about the progress of the policy. It appears that consumers have largely taken sensible decisions with their savings, and predictions of widespread impulsive purchases of Lamborghinis have proved wide of the mark.19 Nevertheless, as would be expected with any radical policy departure, there have been some areas of concern and consequent adjustments are being considered. During the course of our inquiry, the Treasury and FCA launched a joint Financial Advice Market Review (FAMR) and the FCA opened a consultation on its pension rules and guidance.20 In addition, Harriett Baldwin MP, the Economic Secretary to the Treasury (the Minister), announced in oral evidence to us that responsibility for oversight of Pension Wise would transfer from the Treasury to the Department for Work and Pensions (DWP). This welcome move was a recommendation of our predecessor Committee.21

7.In the text of this report, our conclusions are set out in bold type and our recommendations, to which the Government is required to respond, are set out in bold italic type.

1 Taxation of Pensions Act 2014. A defined contribution (DC) pension is one where an individual builds up a pot of money. Contributions are paid into the pot, usually on a regular basis by the individual themselves, and often their employer, and this money is invested. The size of the eventual benefits depends on the amount that has been paid in, the length of time each contribution has been invested, investment returns over this period, charges deducted from the pot and the individual’s choices at retirement. The other main type of pension is a defined benefit (DB) pension. In this case, the benefit is fixed and calculated using a formula; it is not dependent on the success of investments. Typically it is linked to an individual’s salary and the length of time they worked for an employer.

2 Work and Pensions Committee, Fourth Report of Session 2014–15, Progress with automatic enrolment and pension reforms, HC 668, para 67

3 Q25 (Chris Curry)

4 Association of British Insurers (PFA0029)

5 Pensions Policy Institute (PFA0032)

6 Kelvin Financial Planning (PFA006)

7 National Association of Pension Funds (PFA0042)

8 Dr Moshe Gerstenhaber (PFA0002)

9 David C. John (PFA0046)

10 Just Retirement (PFA0033), Q35 (Huw Evans)

11 Citizens Advice (PFA0028)

12 See, for example, Parliamentary Commission on Banking Standards, Changing Banking for Good, First Report of Session 2013–14, Vol. II, HL Paper 27-II, HC 175-II, paras 16-38

13 Access to Pension Wise was subsequently extended to people with defined contribution pension pots aged 50 and above. HMT Treasury, Summer Budget 2015, HC264, June 2015, para 1.227


15 Financial Conduct Authority, Retirement reforms and the guidance guarantee, PS15/4, February 2015. The rules require firms to give appropriate retirement risk warnings to consumers accessing their pension savings. Firms must ask the consumer relevant questions, based on how the consumer wants to access their pension savings, to determine whether risk factors are present. If they are, risk warnings must be given.

16 Work and Pensions Committee, Fourth Report of Session 2014–15, Progress with automatic enrolment and pension reforms, HC 668

17 Ibid, paras 93-4


19 Q34 (Huw Evans)

20 Financial Conduct Authority, Pension reforms – proposed changes to our rules and guidance, CP15/30, October 2015

21 Work and Pensions Committee, Fourth Report of Session 2014–15, Progress with automatic enrolment and pension reforms, HC 668, para 94