A decade of ‘freedom and choice’: Time to rethink advice provision

It is 10 years since the Conservative and Liberal Democrat coalition government’s “freedom and choice” reforms came into effect. 

It meant that ordinary defined contribution (DC) scheme members could use their retirement savings in ways previously only available to those with much larger pension pots. 

However, although Pension Wise’s “guidance” was at the same time, in practice many have less freedom and fewer choices than others. They can be left struggling to understand their options or defaulted into retirement solutions that might not be in their best interests. 

Policy tensions

Retirement policy has long been caught in a tension between two competing groups. A relatively affluent and financially educated group have access to financial advisers, and quite reasonably want to decide for themselves how to use their retirement resources. It’s their money.  

However, a much larger group of people with more modest savings, and limited understanding of financial risk and products, are without access to professional advice. It’s their money too.  

For them, what began with nudges and auto-enrolment has evolved into a growing world of defaults, value-for-money discussions, and increased governance, where those who understand the system aim to give members a gentle steer in what they hope is something approximating a sensible direction.   

Before ‘pension freedoms’, most members had to buy an annuity. Annuities can be a very good thing, but forced annuitisation could be inappropriate. 

Uncrystallised pension lump sums didn’t exist – in other words, a flexible way to withdraw money from your pension without going into drawdown or taking an annuity – while “small pots” were limited to £2,000 and drawdown income was capped unless you had £20,000 a year of guaranteed income. 

With low interest rates and perceptions of poor value from annuities in the headlines before 2014, that world came to an end. 

But there was no sudden change in members’ understanding. As was warned about at the time, the greater freedom for the well-advised also meant that the less well-advised were vulnerable to being scammed. 

The use of unadvised drawdown and other alternatives to annuities has also grown, , as regulated financial advice becomes harder for the ordinary person to obtain. 

Better times ahead?

But perhaps the tide is now turning. Anti-scam rules have been tightening. The first pensions dashboards connections are almost upon us. Collective defined contribution legislation moves forward. 

The 2022 government consultation, , heralds a DC world in which schemes will take a greater role in nudging retirees in a better direction (at least in general, given a particular membership profile). 

Elsewhere, the Financial Conduct Authority’s now proposes “targeted support reforms for pensions”: suggestions developed for a group of similar consumers rather than based on an individual. 

Can and should we go further in enabling more people to access individual advice? 

Some have deep pockets and can already afford the cost of holistic advice. For some, unfortunately, holistic advice will not be worthwhile.  

In the middle sit a fairly large number of people who might baulk at the cost of advice but whose DC pots are sizeable and warrant this support. It’s difficult for members to tap into these pots to pay the market fees for holistic advice, because of tax rules.

These tax barriers make it harder than it needs to be to pay for advice. We can debate quite where to set the limits and boundaries but my answer would be “not here”. 

Would it be in the public interest if more people got more good quality, holistic, regulated advice? And would that be worth a relatively small loss of tax?

Positive freedom requires a capacity to make choices. Whether it be better take-up of “advice”, “targeted support” or “guidance”, the opportunities are here to better support all savers in their retirement choices.

Glyn Bradley is deputy chair of the Pensions Board at the Institute and Faculty of Actuaries.