Two years have passed since the government introduced the pension freedoms, and although the flexibilities have improved engagement to some extent, the increased complexity has also led to confusion.
The freedom and choice reforms came into force in April 2015, enabling savers to choose between drawdown, cash and annuity at retirement, rather than being limited to buying an annuity.
We need to arm people with better decision-making tools and more education
Kate Smith, Aegon
Since then, people have become more engaged with their retirement savings. Research conducted by provider Aegon showed that over 5.5m people are saving more as a direct result of the reforms.
Elsewhere, the research showed that the percentage of people that realised they need to plan more for retirement increased to 15 per cent from 10 per cent in April last year.
With choice comes complexity
However, it has not all been plain sailing. In spite of the encouraging engagement statistics, other research has shown that many savers are confused by the complexity of the changes.
According to a study carried out by Prudential, more than two out of three people over the age of 55 are still confused about the new freedom rules.
And uncertainty is not the only obstacle standing in the way of the pension freedoms’ success. AJ Bell recently found that tens of thousands of people who have used the freedoms since they came into effect have failed to reclaim millions of pounds of overpaid tax that would have been charged on their first withdrawals.
Failing to reclaim tax
Tom Selby, senior analyst at platform provider AJ Bell, said: “Ultimately, it’s down to individuals to go through the process and claim the tax back that they’re owed”.
He noted that it could be a case of people not having a clear understanding of how the tax system works, or that they simply have not got round to reclaiming.
The issue of awareness in this area is “something that we’d certainly like to see… HMRC pay more attention to”, said Selby.
But, he said, the government “might see this as an easy way to boost short-term tax revenue, so are they going to spend potentially millions of pounds on an awareness campaign to help people claim tax back from them when they want the money at the moment?”
In terms of how engagement has developed since April 2015, Kate Smith, head of pensions at Aegon, said that the “freedoms have almost been a catalyst to get more people engaged with their pensions”.
Part of the reason behind this was that the reforms were part of “such a revolutionary move” that all the media coverage helped encourage more people to save.
Improving engagement
When it comes to what more can be done to boost engagement, Smith says this should be covered by the 2017 auto-enrolment review.
On the topic of complexity, Smith pointed out that those saving through auto-enrolment do not have to make decisions given that the idea works on the basis of inertia.
However, when people come to retirement, they will have to choose an option. “That’s why we need to arm them with better decision-making tools and more education,” said Smith.
A trustee's duties in the era of freedom and choice
Freedom and choice has radically reshaped the pensions landscape. From consumers to pension schemes, in many ways we’re all still learning to navigate this new terrain and adapt to unfamiliar circumstances.
Similarly, Philip Brown, head of policy at provider LV, said the “reforms have given consumers increased flexibility over their pension savings, but it is also more complicated for consumers to make the right decisions”.
While the best solution is for people to take financial advice, recent LV research showed that “worryingly, six in 10 approaching retirement don’t plan on using a professional adviser and half think they can make the right decisions without advice”.
Brown said improving consumer interaction with their financial planning was key to the success of the freedom and choice reforms and noted that technology, such as the upcoming 2019 pensions dashboard, can play a crucial part in this.
Steering people towards guidance and advice
Vince Smith-Hughes, retirement income expert at Prudential, emphasised the importance of steering people towards guidance and advice.
However, he said it is encouraging that interest in financial advice has been increasing according to the Prudential research, with 21 per cent of retirement savers saying they are taking financial advice, while a further 9 per cent are either planning to or have done so for the first time.
When it comes to raising awareness of tax issues related to freedom and choice, Smith-Hughes said: “We could probably do with reminding people of the relevant tax forms to complete to reclaim tax, because there are several forms and they’re all used in different circumstances.”
