Better pensions

Summary:

People who save into a pension during their working life deserve to get the most from their pension savings in retirement: it is right that consumers have the freedom to decide how and when they access their money. By allowing savers to exercise choice, the pension reforms coming into effect in April 2015 have the potential to improve outcomes for many retirees. However, people remain worried about whether they will have enough to live on in retirement, and while it is good that those who want it will have access to high-quality information and guidance, more adequate consumer protections need to be in place to ensure retirees are supported to get the best outcomes from the reforms

Decisions at retirement are some of the most complex financial choices a consumer can make that people literally cannot afford to get wrong: this can mean the difference between a comfortable retirement and one just scraping by, overshadowed by constant financial worry. Poor decisions may leave a retiree without the resources to finance the lifestyle they want in later life, or could deny their spouse retirement income should they die.

In order to make this decision, people will need to weigh up many factors including how long they may live, how much they will need to live on, the risk of investments going down in value during retirement, how much they will be charged by pension providers, how they want to access their money and how much tax they will have to pay. With these challenges in mind, it is no surprise that consumers show significant levels of uncertainty and anxiety about retirement. More than half (55%) of people are worried about the value of their pension. Half (51%) say they don’t know how much they will need as a weekly income to live comfortably in retirement.

In the past, these worries have been compounded by the fact that the retirement income market has not met consumers’ needs effectively. Poor value annuities were common, often as a result of poor sales practices. In 2014, the Financial Conduct Authority (FCA) concluded that‘…competition in the retirement income market is not working well for consumers’. The positive pension reforms coming into effect in April 2015 are some of the most radical in decades and have the potential to address some of these issues. They could also expose individuals to new risks. There will be more options available to individuals when they retire, but considerable uncertainty and anxiety surrounding retirement decisions is also likely to remain. As such, it is vital that consumers are supported and protected when deciding how to access their pensions.

The Government’s Pension Wise service will have a key role to play. However, it is important to recognise that, in a market characterised by relatively low levels of consumer engagement, some consumers will not take up the offer of free guidance. This means that safeguards are needed to ensure consumers are adequately protected from poor sales practices, poor value products, scams and wider causes of significant detriment. Although the Government and FCA have outlined proposals to ensure that consumers are supported and protected, we believe that more will need to be done. This report outlines recommendations for both the short and long term to help consumers make the most of the new pension freedoms and get the most value from their pension savings.