Pension freedoms - the 5 month report card

10 September 2015. Published by Rachael Healey, Partner

As children head back to school, what would the pension freedoms' report card look like 5 months in from the April reforms?

The Work and Pensions Committee this week commenced its review of the pension freedoms.  We take a brief look at the key issues 5 months on.

Cash, drawdown or annuity?

£2.5bn has been taken from pension schemes in the first three months since the introduction of the pension freedoms; that’s £27m a day between April and June.  Where has that money gone?

The ABI has reported that £1.3bn has been paid out in cash lump sums with the average pot being around £15,000; £1.1bn has been placed into income drawdown and £990m spent to purchase around 17,800 annuities.

Notably drawdown has overtaken annuities as the favoured product on retirement.  This was a trend anticipated in advance of the April reforms, particularly as consumers in drawdown can keep their options open to see what new products or services enter the market (or until such time as a second hand annuity market is introduced in 2017).  Whether or not those in drawdown turn to annuities given recent stock market volatility, we will have to wait and see.

Can I transfer please?

As we have previously reportedthe pension freedoms heralded a revised set of rules for pension transfers and particularly in relation to the circumstances where members have to obtain regulated advice.  The key areas are transfers away from final salary schemes and pensions with so-called “safeguarded” benefits.

The FCA anticipates that there is likely to be an annual increase in transfers from final salary to money purchase schemes of 9,000 to 15,000 in light of the pension freedoms.  Most providers and trustees have seen an increase in transfer value requests since April compared to previous years but there is currently little information as to whether or not these requests have materialised into transfers.

Transfer requests have led to a number of publicised issues including (1) members incorrectly receiving advice from advisers who are not pension transfer specialists, (2) a number of firms refusing to transact pension transfers on an insistent client basis and (3) the refusal of providers and trustees to provide for a transfer where there was a risk of the member transferring to a pensions liberation scheme.

Availability of the new freedoms

The pension freedoms seek to broaden options for members on retirement, as members can now choose between cash, an annuity or drawdown in the form of flexi-access drawdown or uncrystallised pension fund lump sums.  However, most schemes have declined to offer all of these options.  A recent survey found that less than half of 100 surveyed FTSE 350 companies planned to offer drawdown within their existing schemes. 

In response the Government has launched a review inviting pension providers to provide information as to whether or not they are offering the new freedoms as part of their product range.  It may be that incentives to offer the freedoms follow.

What next for annuities?

Whilst annuity sales decline and there is uncertainty over the proposed second hand annuity market, providers face a mis-selling probe into the sale of enhanced annuities.  The probe follows the FCA’s February 2014 report which identified that in 80% of cases pensioners would have received a better annuity rate had they exercised their open market option and moved from their existing provider.  This increased to 91% with enhanced annuities. 

It is understood that 60,000 pensioners may have been sold a standard annuity when they were in fact entitled to an enhanced annuity; it is with these sales that the FCA is concerned in its review.

Despite these findings, available data for the period between April and June indicates that 55% of those purchasing an annuity stayed with their existing provider.

Could do better?

Many retirees have taken advantage of the new freedoms with £2.5bn having been taken pensions in the period between April and June of this year.  Only time will judge the success of the pension freedoms as will the hearings before the Work and Pensions Committee over the coming weeks.

The 5 month report card is likely to say promising start, good potential but more work to do.

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