Protecting pension savers—five years on from the Pension Freedoms: Accessing pension savings – Report Summary

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Summary

In 2015, many people aged 55 and over were given more choice about how they access their pensions, which led to wholesale changes in the industry and the way people plan to use their pensions. The pension freedoms gave people the freedom to choose what to do with their money. These new freedoms also brought new risks. On balance, these changes have been a success and we do not want to see them rolled back. However, many savers need more support than they currently receive in order to make good decisions about how they access their pension savings. We recommend that the Government and regulators should play a more active role in supporting savers than they did when the pension freedoms were first introduced.

The Minister for Pensions told us that the Department for Work and Pensions is trying to make pensions simpler. We support this principle. Simplicity alone, however, is not enough to improve outcomes for savers. The Government and regulators will either need to increase saver engagement—encouraging and enabling savers to make their own decisions—or take a more interventionist approach with passive savers to ensure that they do not default to a decision against their best interest.

Options when accessing pensions

People can usually take up to 25% of their pension as a tax-free lump sum. This is one of the most well-known UK pension policies and leads to many people who access their pensions for the first time taking poor decisions about the remaining 75%. We heard persuasive arguments both for and against decoupling the 25% of a pension pot which is tax free from the rest of the pot. The best way to assess these arguments is through further research and testing. We recommend that regulators should carry out a scoping exercise to establish the research and testing which could be undertaken on decoupling the 25% of a pension pot which is tax free from the rest of the pot and present their findings to our Committee.

We were told that most savers want a reliable income in retirement. Annuities provide this for savers with defined contribution pensions, but have dramatically fallen in use since the introduction of pension freedoms. The transition from defined benefit schemes to defined contribution schemes means that fewer people will have occupational pensions which provide a guaranteed income in future and therefore we expect there to continue to be a demand for annuities or annuity-like products.

Many more people than currently do would, however, benefit from making greater use of the pension freedoms by choosing a mix of annuities, lump sums and drawdown rather than a single product. For example, a person may wish to withdraw a lump sum when they first access their pension, later choose to use drawdown flexibly before finally choosing an annuity in later life. However, these options will be difficult for savers to choose themselves without thorough guidance and most savers would likely need paid-for advice, which gives a personalised recommendation, to choose a suitable mix of products.

The Pension Schemes Act 2021 enabled collective defined contribution (CDC) schemes, which provide retirement incomes from a collective fund. The income from the fund received by members varies depending on how the fund performs. There is demand for the further development of CDC schemes in future and it is therefore right that the Government continues to support this. We welcome the Government’s intention to start consultations on master trust and multi-employer CDC schemes later this year. We recommend that the Government publishes a framework for assessing the success early CDC schemes.

Supporting decision making at the point of access

Measures are in place for contract-based schemes to offer investment pathways, but equivalent measures are some way off for trust-based schemes and their final form may differ. This is not an isolated case of different measures being in place for contract-based and trust-based schemes without a clear rationale. We are disappointed that yet again the two pension regulators dealing with savers in near identical positions have failed to coordinate their work resulting in unnecessary risk for members of trust-based schemes and the pension landscape being more confusing than necessary. We recommend that all consultations covering pension regulation should be run jointly by the Pensions Regulator and the Financial Conduct Authority unless there is a clear and published reason for a different approach.

Pension Wise is a well-regarded but under-utilised service. The Pension Freedoms will be seen as a failure if savers make poor decisions without receiving the guidance they were promised when the freedoms were introduced. The Minister for Pensions and Financial Inclusion’s previous agreement that having a Pension Wise appointment should be “the norm” was welcome, but he has since distanced himself from this view. Neither the Minister nor regulators would tell us what they thought the usage levels of Pension Wise should be. We recommend that the Government sets a goal for the Money and Pensions Service for the combined use of Pension Wise and paid-for advice when accessing pension pots for the first time. This goal should be at least 60 per cent and expressed in terms of individuals rather than pots. It could include an exemption for smaller levels of saving.

The “stronger nudges” towards guidance being proposed by the Department for Work and Pensions and the Financial Conduct Authority will not be enough to make receiving pensions guidance the norm. The Money and Pensions Service told us that it would support a trial of automatic Pension Wise appointments and we can see no clear barrier to doing this. The Minister for Pensions and Financial Inclusion has expressed reservations about introducing automatic appointments—but those could be tested by a trial. We recommend that automatic Pension Wise appointments are trialled. The Government should initiate two trials: one with an appointment when a person accesses their pension for the first time and another at the age of 50, before they can access their pension savings.

Advice is a personalised recommendation that can only be provided by a regulated firm at a cost. Few people seem to be willing to pay for financial advice for the decisions they make about their pension savings—even though doing so could significantly improve their financial situation. More people would benefit from regulated advice before accessing their pensions than currently use it. We recommend that the Government should report annually on progress and plans to increase the uptake of pensions advice.

The Pension Advice Allowance allows £500 to be withdrawn from a pension up to three times in different tax years for advice. Either because of a lack of awareness or lack of demand the policy is not working. Its design has made it unusable by most savers. We believe that the broad aim of the policy is correct, but it has been poorly executed. We recommend a full review and overhaul of the Pensions Advice Allowance.

The line between advice and guidance is a continuing issue of debate. There is demand for both enhanced guidance and limited advice, but there is reluctance from the industry to operate too close to the advice/guidance boundary and resistance to such services being offered by the Money and Pensions Service, both because of the likely additional cost and regulatory requirements. We recommend that the Financial Conduct Authority uses the definitions below of enhanced guidance and limited advice:

  • Enhanced guidance: guidance on the options available which is tailored to an individual dependent on the information they provide, without a recommendation. This is not a regulated activity.
  • Limited advice: a recommendation made to an individual based on limited or partial information about them.

The Financial Conduct Authority should provide examples to the industry to encourage the wider offering of enhanced guidance and limited advice to the fullest extent allowed by the existing law.

We recommend that the Money and Pensions Service offers enhanced guidance, under our proposed definition, through its pensions services. We also recommend that the Money and Pensions Service establishes an industry group to develop best practice proposals and templates for offering enhanced pensions guidance.

Most guidance is currently delivered by individuals, which is costly, or through written communication, which is unengaging. In future we envisage a significant proportion of guidance or triage services will be delivered through digital tools. This should be a key consideration in the implementation of the recommendations we have made to regulators and the Money and Pensions Service.

Pensions dashboards

Pensions dashboards will let people see all of their pensions on a digital platform. This has the potential to be the most influential policy in helping people take good decisions when they first access their pension pots. To be successful, pension dashboards will need correct and up to date data from every pension scheme. This is a huge undertaking. It is vital that the pension dashboards programme continues to be properly resourced to get the implementation of dashboards right. Too often pension policies have been undermined by bad data.

When pension dashboards launch it will not be possible to undertake any transactions through them. We understand why some people are calling for transactions to be facilitated through pension dashboards. However, with dashboards a long way from reality and a need to build trust in the system, we recommend that no consideration is given to allowing transactions through dashboards until they are well established.

Supporting decision-making before accessing pension savings

The simpler annual pension statement introduced by the Government will require schemes to show information to members in a consistent way across the industry. We welcome the simpler annual pension statement and believe it will be particularly beneficial to people with many pension pots.

The Government has also stated its intention to introduce a pension statement season, which would be a short period each year when schemes were required to send savers annual pension statements. We are not convinced that the gains from a statement season will justify the complexity of introducing it. In our view, the measure is at best a stopgap until pension dashboards are available. Given the likely cost and disruption to the industry, we recommend that the Government be prepared to adapt or drop its proposal for a pension statement season if the benefits cannot be robustly demonstrated.

The midlife MOT is free support for people in their 40s, 50s and 60s to make plans about work, wellbeing and money. We welcome the principle of a midlife MOT, but believe that the policy is not yet providing the support envisaged for most savers. For the “my money” part of the midlife MOT, we recommend that the Department for Work and Pensions, supported by the Money and Pensions Service, undertakes research to improve the proposal.

Wider government policy

We support the Government’s intention to make pensions simpler. Recent policy changes to the normal minimum pension age have highlighted the difficulties of achieving this and we are disappointed that these changes have made making decisions about accessing pensions even more difficult. Savers take a working lifetime to build up pension savings, through many changes of policy and government. We urge the Government to do everything in its power to ensure that future changes do not bake additional complexity into the system for decades to come. Where additional complexity is inescapable, we recommend that any Government consults early, thoroughly and aims to achieve cross-party consensus.

The Government, regulators and the Money and Pensions Service are introducing multiple policy interventions to support the pension freedoms. Six years on there remains no framework against which to evaluate the success of the freedoms or make judgements about the need for—or effectiveness of—support interventions. Our predecessor Committees have asked three times for the Government to improve its monitoring and reporting on the progress of the pension freedoms. We recommend that the Department for Work and Pensions and the Treasury jointly produce an annual assessment evaluating these measures holistically. We would expect several of the recommendations we have made in this report to appear in that publication.