Work & Pensions Committee inquiry on Accessing Pension Savings - Which? response

Summary

Which? welcomes the opportunity to submit written evidence to this inquiry into accessing pension savings. Which? fully supports the principles of the 2015 pension freedoms reforms as we believe that giving consumers greater choice over how they access their pension wealth has the potential to lead to better outcomes than pre-2015.

However, the 2015 reforms have not been completely successful. On the whole, they are likely to be utilised by those with relatively large defined-contribution pension pots, who can afford to pay for advice when accessing their pension. Which? research has shown that the take-up of advice and guidance remains worryingly low, which in the case of advice is because - for a majority of savers - it is too expensive. These savers, who do not have large pension savings, are forced to make complex and difficult choices with little support. Pension Wise guidance may help, but it inevitably lacks the personalisation that many people require.

Faced with the complexity of the market, people move towards the path of least resistance, regardless of whether this meets their needs or gives them good value. Six years on from the Pension Freedoms reforms it is time for the Government to revisit how people access their pension savings, to design a system that protects consumers and is built with the central goal of providing people with a sustainable income in retirement while maintaining their ability to access their savings flexibly.

Which? believes the system for accessing pension savings should be designed to provide good outcomes without expecting consumers to have high levels of understanding and engagement. A great success of automatic enrolment is that it harnesses the power of inertia to provide pension products that are safe and will provide a decent outcome for most savers. The Government and industry should learn from this to create products that will offer an equivalent for people when they access their pension savings. However, given low levels of consumer engagement and understanding of pensions, and the challenges in increasing take-up of advice, this will only be possible if pension schemes take on greater responsibility for making some of the most challenging decisions for their savers into retirement, including how to manage longevity, inflation and investment risks. As with auto-enrolment, this should be provided on an opt-out basis so that those who wish to take advantage of the pension freedoms can do so at any point, before or after an income has begun to be paid out.

• Recommendation 1: Pension schemes should be required, by default, to provide a sustainable income to savers that is paid out from their selected retirement age.

 Policymakers should also make it easier for consumers to make good choices. Consumers face a range of difficult decisions at various points of retirement, but numerous aspects of the pension system mean that they are not well prepared to be able to do this. This includes a failure to be transparent about fees and charges when people are saving; allowing people to build up many small pensions across multiple providers; and conflating decisions about accessing tax-free lump sums and providing an income in retirement.

•  Recommendation 2: The Government should go further with its proposed mandatory simpler statements by requiring personalised costs and charges information in pounds and pence, in one single figure
• Recommendation 3: The Government and the pensions industry should develop a system of automatic consolidation for small, deferred pots.
• Recommendation 4: The Government should decouple the ability of a saver to access their tax-free lump sum from other pensions decisions.

There should also be better protections for savers even if they have engaged to some extent. In particular, customers of income drawdown products, which were originally designed for sophisticated investors, should be protected from excessive charges. As the FCA has found, many of these customers have not switched providers and engage little with their savings once in drawdown, with many not actually withdrawing any funds and so not fully utilising the product they have chosen.

• Recommendation 5: The Government should require the FCA to introduce a charge cap for non-advised customers accessing drawdown products.