By Debbie Falvey - DC Pensions Lead at Aon Employee Benefits
Pension freedoms: freedom and choice for the average person, that's the idea anyway. It means retirees now have the power to draw their pension when and how they want. It has given people choice and complete control over how they spend their money. It sounds ideal, what could possibly go wrong?
Yet, pension freedoms, for all their good intentions, bother me, because they were introduced so suddenly, so unexpectedly, the industry had little time to prepare for the introduction of the new rules. They didn't even have time to develop tools and services to help support members through a complex decision-making process. But what really concerns me though, is whilst retirees now have control over their pension spending, they remain just as confused and overwhelmed with pensions as ever. How can you possibly make informed, important financial decisions when many barely understand the basics?
Two years ago, when pension freedoms were first introduced, there were fears that pensioners would go on spending sprees, making bad choices and wasting money on Lamborghinis or villas in Tuscany.
Last August, the Association of British Insurers (ABI), whose members are mainly defined contribution (DC) scheme holders, published details of pension withdrawals since the new pension rules were introduced, and mercifully, they showed that the majority were remaining prudent with their savings.
What does Mr and Mrs Bloggs on the 09:23 to Hammersmith make of it? Who will they go to for advice, if anyone at all? What help do they need? Will they spend their savings in a reckless fit of excitement or do they remain paralysed with fear and do nothing at all, terrified of making the wrong decision?
Let's use a real example of what can happen. John retired at 62 and moved to France with his wife, Barbara, 60. Barbara had a few small defined contribution (DC) plans as well as reduced state pension whilst John had a MOD pension and £250k (post tax-free cash) in a SIPP. Their living expenses were covered by most of their combined pension savings but they needed additional income from a drawdown plan to make life more comfortable. John didn't fancy the idea of paying for financial advice, he didn't know what his SIPP product cost him, and he decided to manage his own investments, whilst trying - and failing - to predict investment markets. He was constantly worried about withdrawing funds and so was often reluctant to withdraw income at all, so they were often - needlessly - short of money.
John developed Parkinson's Disease and at 69, he suffered a stroke leaving him paralysed and unable to cope with finances. Barbara took over and managed to convert the funds into an enhanced annuity with a spouse's pension. Like many in that position, Barbara wanted a secure income as it became clear that John would not enjoy a long life.
I think that John and Barbara's case is anything but unique. There are thousands like them and John and Barbara's situation illustrates that life is what happens whilst we're planning for other things. People's choices are driven by emotion, not logic and insight. I know this matters. John was my dad.
It's why I am so passionate that the pension industry needs to come up with solutions that recognise real people's lives. We need cost-effective drawdown investment solutions which are fit for investment novices, we need to provide access to help and support throughout the retirement journey, we need accessible tools to help people understand how much income they require and how much they can draw and above all, we must make it really easy to change course, and easy to access an annuity option if life circumstances suddenly change, and they want or need certainty.