UK Pension liberalisation: freedom and choice or risk and insecurity?

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Today marks Pension Awareness Day, a day to promote the importance of saving for the future, alert the nation that they are not saving enough for retirement and encourage pension providers and employers to provide easily understandable and accessible information.

By Louise Overton, Lecturer in Social Policy at the University of Birmingham

Since the introduction of ‘pension freedoms’ in 2015, people approaching or in retirement now have more choice about how to access their Defined Contribution pension savings from the age of 55, including taking the entire pension pot as a lump sum, keeping the fund invested and purchasing an annuity. But they are also now required to make decisions that will have a greater impact on their future financial security, and it is not yet clear whether the existing framework for helping people to navigate this increasingly complex landscape offers an appropriate level of consumer protection.

Seeking advice before you ‘buy’

Government-provided information and guidance appears to be having a limited impact, with just 1 in 10 accessing the Pension Wise service to help them think through the implications of the decisions they are making. As annuity sales plummet, it is clear that, with the ‘freedom’ to choose, the vast majority of retirees are opting against a guaranteed, secure, income for life. A recent FCA report [1] also indicates that an increasing number of people are entering income drawdown arrangements without taking financial advice or shopping around (with consequent confusion around the details and operation of their pension products). Furthermore, nearly a third of consumers have fully withdrawn their DC pension pots to move savings elsewhere, including low-interest bearing current and savings accounts. While the Treasury stands to gain, at least in the short term, from more people cashing in their pension pots (the reforms brought £1.5 bn in tax revenue in 2015-16 – £1.2bn higher than its original forecast [2]), these decisions may be compromising people’s long term financial security.

Proposals to remedy these emerging concerns have largely centred on the information and advice gap, including the creation of a Single Financial Guidance Body to bring together and replace the Money Advice Service, the Pensions Advisory Service and ‘Pension Wise’, with the aim of increasing awareness and uptake. While it is certainly true that more could be done to help money guidance reach older people, for advice to be effective, more also needs to be done to help people process and use this information in their decision making. Our research [3] with older consumers of financial services indicates that people benefit from carrying out research prior to seeking advice and also having the time to absorb the information received, perhaps over a series of conversations.

Online tools vs face to face communication

While many of the recent suggestions for ‘smarter consumer communication’ [4] involve the use of online and interactive tools, our research indicates that face to face communication, particularly with a personable adviser, can play a key role in determining how helpful consumers find advice, and how that advice influences their subsequent decisions. These findings suggest the importance, and challenge, of the role of ‘soft skills’ training, alongside current trends towards innovation in technological communications.

Improving the pension product

In any moves towards improving access to, and effectiveness of, financial decision-making support, there must also remain acknowledgement of the limitations of consumer protection strategies based on information and advice, and consideration for what else might be done to help older people meet their retirement needs more effectively. This should include serious consideration of the development of default decumulation options, combining an element of flexibility with income security, to ensure appropriate protection for those who are unable or unwilling to make a fully informed decision. The regulator is currently consulting on this option, but concerns have been expressed over the extent to which such an approach would undermine the principles underpinning the pension freedom policy. But unless there is some rebalancing of responsibility for later life financial security, with greater effort from industry and government to protect people from poor retirement outcomes, the reforms look set to offer greater risk and insecurity, casting a long shadow over freedom and choice.


[1] FCA (2017) Retirement Outcomes Review, Interim Report, July 2017, London: FCA

[2] ABI (2017) The New Retirement Market: Challenges and Opportunities, London: ABI

[3] Fox O’Mahony, L. and Overton, L. (2014) ‘Financial Advice, Differentiated Consumers and the Regulation of Equity Release Transactions’, Journal of Law and Society, 41(3), 446-469; Overton, L. and Fox O’Mahony, L. (2015) The Future of the UK Equity Release Market: Consumer Insights and Stakeholder Perspectives

[4] https://www.fca.org.uk/publication/discussion/dp15-05-smarter-consumer-communications.pdf

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