Pension freedoms are here to stay. Despite prophecies of doom, they have provided greater choice over how and when people retire, and provided greater understanding of how the system works, with most sensible savers seeking advice.
It is impossible to legislate for stupidity and greed. For the vast majority, the pension freedoms are operating well. This is a genie we should not even try to force back into the bottle.
Introduced by then-chancellor George Osborne in 2014, freedom and choice for defined contribution schemes came as an absolute bombshell to many in the world of pensions. It was a surprise to those in the worlds of Westminster and Whitehall too.
The final removal of any requirement to buy an annuity (in truth it had not been compulsory for some time) was a bold move, and went against the grain of thinking in the Treasury itself.
Only a few years before, the Treasury published a policy paper arguing the quid pro quo of tax relief being granted on pension contributions was a requirement to secure an income for life, usually through an annuity.
This thinking was straight out of the defined benefit world. In many ways this operates like an annuity: your money is in someone else’s hands and they pay you an income from it.
The real bombshell was that now you could take whatever you wanted, when you wanted it, subject to tax: even the whole fund. It was all up to you.
There were howls of anguish from the pension industry. The effects for some market participants were very real, with share prices going into free fall in some cases.
Consumers, on the other hand, welcomed the move with open arms. My inbox rapidly filled with positive messages from the public, who were suddenly much more engaged with their pension funds than had previously been the case. Now they could do something ‘useful’ with their money, they thought.
The then-pensions minister Steve Webb famously said we might see Lamborghini sales go up, a turn of phrase I suspect rather haunts him. Prophecies of doom abounded. Most prominently, the danger of people running out of money in retirement because they did not buy an annuity and underestimated their own longevity was voiced.
The paradox was this policy of trusting people with their own money was a strongly libertarian measure that allowed people to get it wrong. This flew directly in the face of the prevailing regulatory orthodoxy. People would now have to take responsibility; they would have to engage, and understand.
Recently, expressions of some disquiet have emerged, citing ‘unexpected consequences’ of the policy. The recent Financial Conduct Authority retirement outcomes review, however, concludes overall that people largely appear to be doing sensible things with their pension funds.
Clearing mortgages, paying down unsecured debts, drawing tax-free cash and paying for home improvements are all valid things to do. Smaller funds are being drawn in full or taken in chunks over a few years. Income drawdown is emerging as the new norm, outselling annuities by two to one and rising.
Sensibly, nearly 70% appear to be taking regulated financial advice before going into drawdown. This certainly chimes with the picture that is emerging from financial services provider call centres, too: sensible people are doing what seems right to them.
Of course, there are people taking their funds in full, paying too much tax, and putting the proceeds in a bank account, for example. There are scams operating, too, which we need to tackle strongly. But ultimately, the pension freedoms are working well.
Malcolm Small is special adviser, retirement at Copia Capital Management