28th July 2015

Royal London: Pension Freedoms – so far so good?

Now that we are a few months into a new pensions regime and our new Pensions Minister is officially in office, let’s pause for a moment and see how it all has gone so far.

In general, the national press were covering the new freedoms with a positive slant just before and just after they came into force on 6 April. But since then there have been various stories about how people are being prevented from getting their hands on their money, or can’t take advantage of flexible access drawdown.

One reason for this is that the FCA and The Pensions Regulator have put in place rules and regulations designed to prevent people making bad decisions that could see them at a financial disadvantage. But there are other reasons too.

In the case of trust-based schemes, research from Sackers¹ suggests that while 67% of schemes surveyed would offer the new flexibilities to members, only 14% will offer flexible access drawdown (FAD). However 94% would offer an uncrystallised fund lump sum (UFPLS). What that means is that most trust-based DC schemes will only offer UFPLS and members who want to take advantage of FAD will have to transfer out.

So at the moment, it seems that there is little appetite among trustees to offer full flexibility. This might be because of the cost of creating and implementing systems to allow full flexibility. It might be a lack of third party solutions available. Or it might be that the regulatory risk is too great. All this is understandable as it’s still early days. But perhaps now that NEST have published their "retirement income blueprint"² for their members, new solutions and innovations will come to market that all trustees can use.

There are similar issues when it comes to contract-based schemes. Some (especially older) contracts might not be held on a system that can cope with full flexibility. Changing the system might cost too much, so the only option available might be UFPLS, or a transfer to a plan that can offer full flexibility.

Other issues include guaranteed annuity options. Where the policy value is more than £30,000, advice will be required before either UFPLS or a transfer can be taken but many people might not want to take advice either because they think they don’t need it, or they think it costs too much. In cases like this, maybe PensionWise could step up and provide suitable guidance.

There is little doubt that the new pension freedoms are a good thing. But there is still a long way to go in making sure that the people who want to take advantage of them can do so at a reasonable cost while protecting them against detrimental decisions. That’s why we will continue to work with the industry and government to do just that. After all, it’s in all our best interests to do so.

Pensions, Pension Reforms