I was most interested, if a little surprised, to read in a recently published report from the Public Accounts Committee (PAC) that in their view “pension freedoms are a potential trigger for mass financial mis-selling”.
Some mis-selling? Perhaps relatively speaking quite a lot - yes probably. And many people getting it wrong and drawing too much or too little out of their pension pots? Yes certainly. And the Treasury surreptitiously doubling or even trebling their tax take? Yes undoubtedly. But MASS financial mis-selling? That sounds very alarmist and takes the problem up to quite another level which, if it were true, should mean a dramatic curtailment and/or rowing back on the entire policy forthwith.
"Clearly much more needs to be done to ensure consumers have a better understanding of the products they are purchasing and, in many instances, the risks involved."
I doubt very much that the government would want to go down that particular road, and certainly not at this relatively early stage.
Complications and pitfalls
That said, there is no room for complacency about some of the risks inherent in a major policy switch which was sprung on the industry at very short notice and with little time to prepare.
I think most of us thought the introduction of pension freedoms was generally a good thing from a consumer perspective (giving them greater choice and flexibility regarding how to use what is essentially their own money) but there is no doubt that this substantially complicated the whole decumulation process and exposed individuals to pitfalls and risks that did not exist previously.
Educating and informing consumers
Clearly much more needs to be done to ensure consumers have a better understanding of the products they are purchasing and, in many instances, the risks involved.
Common misconceptions include the notion that a pension pot can be used for withdrawals like a bank account or for the purchase of a buy-to-let property without making clear the tax consequences of doing so in either situation. The freedoms have also resulted, indirectly at least, in an increase in potential pension frauds and other scams which again exposes new pensioners to the risk of being conned out of their hard earned savings.
The government is looking to reorganise the Pension Wise service to make it more effective in terms of delivering more and better guidance to the consumer population. There does, however, need to be a concerted effort from across the industry to improve understanding and encourage the taking of regulated financial advice wherever and whenever it is appropriate to do so – which may be more often than most people currently seem to think.
The so-called second line of defence also needs to be beefed up whilst the language of pensions has to be sorted out and made much more consumer friendly than it is at present. It surely goes without saying that ridiculous expressions like Uncrystallised Fund Pension Lump Sum must be cast aside without further delay.
"I am afraid that for many though, annuities are now something of a tarnished brand, seen as being of poor value and inflexible, with the very name a turn-off."
Re-branding the annuity
And shouldn’t we be making more of an effort to try to restore the image and reputation of annuities? Despite the alleged popularity of the freedoms I can’t help feeling that what the majority of newly retired people really want is a regular, secure, guaranteed income throughout their retirement, which is exactly what an annuity will give them.
I am afraid that for many though, annuities are now something of a tarnished brand, seen as being of poor value and inflexible, with the very name a turn-off in many instances. New products are now on the market which have yet to fully make their mark but may in the fullness of time develop into something that gains wider recognition. But there is still an awful long way to go before annuities become once again, if they ever do, the natural end product of a DC savings plan.
Looking to the future
So where do we stand now and where might we be in five or ten years time? Will the trigger that the PAC fears be pressed, and kill the policy stone dead as it appears to have done in Australia? Or can pension freedoms, as a concept at least, be built upon and alongside a more vibrant annuity market made to work better for the benefit of all? We shall no doubt find out in the light of hard experience in due course.
This article originally appeared in Money Marketing