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Your Later Life 2020

Evolution of the pension freedoms

Lizzy Holliday

Head of DC, Master Trusts and Lifetime Savings, PLSA

It was back in 2015 that we saw the launch of game-changing Pension Freedoms Act. Suddenly, retirees had a multitude of options to consider. Now, five years on, how successful have they been?

Freedom is an attractive concept, and there is an intuitive fairness in enabling savers to directly access and make decisions about what to do with their hard-earned and saved money.

But, in practical terms, how has it worked out for savers? And, from the point of view of the PLSA mission ‘to help everyone to achieve a better income in retirement,’ how is it measuring up?

Freedoms and risks

The pension freedoms mean that, rather than usually having to use defined contribution (DC) savings to purchase a ‘lifetime annuity’, people can instead access their DC pension savings as cash.

They can also invest, or ‘drawdown’ regular or lump sums, or purchase an annuity.

Five years since the freedoms were launched, debate about their suitability and effectiveness continues.

The new options shift a number of risks onto the individual in retirement. For example, the possibility of running out of income, ongoing exposure to stock market fluctuations, and potential diminished decision-making capabilities needed to manage these products, are all down to the individual to take on.

What are savers doing?

While the real impact of these risks will be borne out in years to come, studies of trends and behaviours indicate a significant shift away from lifetime annuities and over to flexible drawdown.

Prior to the reforms, 90% of pension pots moved into annuities in the decumulation phase.

By June 2018, FCA reported that twice as many pots were moving into drawdown than annuities with 2019 figures suggesting the downward trend in annuity sales has continued.

The total value of flexible withdrawals has risen steadily, and now exceeds £35 billion.

Supporting all savers

One of the challenges for achieving good outcomes and successfully supporting savers is the historic and current low level of savers engagement with their pensions.

In a context where the greatest success in getting people into a pension has been achieved through harnessing the power of inertia, demanding complex decision-making and risk-management at retirement is a significant contrast.

Addressing education and advice gaps is part of the solution – but may not be sufficient for all.

The system at retirement should work for those who don’t know much about pensions, or who are concerned about making the right choice, as well as those who have detailed plans and have confidence in knowing their options.

This is why we have been seeking to further develop a new approach that speaks to the type of engagement we see in reality and mitigates some of the risks for savers.

Evolving pension freedoms and guiding savers

In Hitting the Target, the 2018 report that set out the PLSA’s vision for achieving income adequacy for all, we recommended – following extensive consultation – proposals called ‘guided at-retirement decisions’.

Put simply, this is a way of schemes signposting savers to specific financial product options where they don’t offer decumulation products themselves. This provides savers with a helping hand on their next steps.

In addition, we proposed a set of standards for what those ‘signposted’ products should offer, to address some of the key risks to savers in respect of retirement incomes.

The idea is that, a few extra ingredients to support the freedoms would improve the experience – and the quality of outcomes – for a wider range of savers.

Five years since the freedoms were launched, debate about their suitability and effectiveness continues.

This year, we are publishing more detailed proposals to implement our ‘guided at retirement decisions’ policy, which seek to evolve the freedoms by supporting schemes to deliver more support for savers and to better manage the risks in the system.

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