Some warning signs
In his now famous Budget Speech of 2014, the then Chancellor of the Exchequer George Osborne said;
“People who have worked hard and saved hard all their lives, and done the right thing, should be trusted with their own finances”
Then he went on to announce the introduction of a major, and wholly unexpected, policy change regarding pension savings. This announcement heralded the beginnings of what the media, savers, and the long-term savings industry now refer to as Pension Freedoms.
The reasons behind the decision to allow savers much greater flexibility with their pension savings were many and complex, and it’s probably of little value to revisit much of that debate here. Yet the key reason for change was that savers with Defined Contribution (DC) pension funds were largely reliant on annuity rates when converting their savings into a lifetime pension income.
Annuity rates are driven by a number of factors, but a key driver is that they are heavily influenced by interest rates. The UK is of course experiencing a sustained period of very low interest returns, and it follows that the annuity rates available to retirees are therefore much reduced from those available in the 1980’s and 1990’s. This in turn led to much unease about the apparent poor return on pension savings at the point of retirement.
Pension Freedoms are an important step in changing this damaging perception. The new rules enable savers to avoid locking-into poor annuity rates where they are not appropriate, and have been welcomed by many. It should also be noted that the new Freedoms have already been used with some enthusiasm by many older savers in DC pension plans.
Yet the same arguments do not really apply to those savers fortunate enough to be members of Defined Benefit (DB) pension plans. Such schemes provide a promise of a guaranteed level of income to the saver regardless of interest rates or other factors. Poor annuity rates are therefore not of any particular direct concern to the saver, and it therefore follows that Pension Freedoms should appear less attractive to DB members.
Yet the reality is that the numbers of DB savers transferring their benefits to DC pension schemes has suddenly exploded, and The Pensions Regulator has suggested that some 80,000 such transfers took place in the 12 months to March 2017. Many of these transfers will have been for perfectly good, compelling, and justifiable reasons. Yet many others will be driven purely by the seductively large sums of money that can then be accessed by the saver/pensioner as a result of the DC Pension Freedoms.
It remains to be seen what long term impact such actions will have on medium and long-term retirement income streams of savers, or indeed what potential future problems this may create for the nation in terms of likely extra financial support for those that spend their retirement savings far too quickly. These are topics that we will of course continue to monitor and comment on in future years.
Yet there are already some valid concerns being raised about the numbers and suitability of many such transfers, and it seems likely that at least some savers are making ill-informed decisions. And of course there are the much more worrying examples being reported in the media of criminal activity, where the saver is effectively being tricked out of control of their lifetime savings.
It is therefore becoming increasingly apparent that many savers need to better understand the dynamics at play around pension transfers and/or income decisions, and employers are clearly well placed to help with this important mission. We would therefore strongly urge employers to make their employees aware of the options to support them in this area – including advice, guidance, and financial education in the workplace.