Freedom and Choice: don't leave your members in the dark at retirement

Estimated reading time: 4 minutes

The ‘Freedom and Choice’ reforms shook up the pensions market a few years ago and meant that a pension pot no longer needed to provide an income for life; people were free to use it as they wish.

However, as the name suggests, more freedom equals more choice and that, unfortunately, makes choosing what to do with a pension pot at retirement more complex.

Before the new freedoms and choices were introduced, pension members would accrue a pot of money and, at the end of their working life, either purchased an annuity or went into a draw-down policy if they had a large enough fund value. The pension reforms turned that two-option model into a triangle. We now have a third option; to take all our money as cash. However, if a member selects any of those options in isolation, they  are not covering some of the major risks that exist in retirement. It is almost impossible to say what the right option is.

For most people, retiring from somewhere within the triangle, rather than choosing solely from one of the three options, will be the best approach; i.e. some sort of combination of at least two of the options. In truth, however, it’s difficult for members to know if they make the right decision because the future is impossible to predict. People make a decision based on many variables, which they largely have no control over. These include; how long they will live, the investment environment, the geopolitical situation, their future health and long-term care needs.


Making the wrong decision at retirement can easily waste ten years' worth of contributions. It’s also important to remember that retirement is a time when many people are at their most vulnerable. Their pension pot is the biggest it will be, the most money they have ever had access to.  


Companies pay a lot into employees' pensions over the years so it’s puzzling why they would want to see them waste it on a stab in the dark at retirement time. Employers have been responsible for overseeing members' interests while they've been paying into the pension plan for decades – whether that was DB or DC.  Recently, employers have had less to do in this oversight role of DC but they do not appear to have done a huge amount with regard to communicating and clarifying the options available to members, especially at the most crucial stages. Currently, trustees (or managers) of pension schemes do not need to support their members in the run up to retirement, other than by telling them what the options are.

It is difficult to decide what the right options will be, but it is easier to identify what the wrong options are. So, if we start by ruling out these options, we can narrow the field and home in on what a member really wants from their retirement planning.

There are many models being built at the moment to advise on this. Some are automated but the Financial Conduct Authority (FCA) insists that an adviser puts their name to any advice offered. Unfortunately, even for a mix of technology doing the research and an adviser signing off the advice, the likely cost of this isn't yet down to a level most individuals are comfortable spending, despite the potential long-term gains.

There are some simple things that can be put in place to help members avoid wasting contributions by choosing the wrong option, too early. For a small extra investment, employers can put a strong framework in place to help employees at the point they reach retirement. This is where Barnett Waddingham could help. Rather than giving everyone the same advice, as happens now, our solution is to help a company establish a trusted triage service, similar to that used in hospitals. Through this, we can narrow the range of options down for each individual, suggest the types of product that may suit their needs and recommend financial professionals they can speak to about these.

This is not regulated advice, but simply guidance, pointing people in the right direction. It can help to avoid people feeling that they have no support and are “in the dark” at a crucial moment in their lives.  As an independent firm, we don’t have any of these products ourselves; we simply help companies help their employees.