Savers to be ‘nudged’ into better pension decisions

Pension schemes will have to offer a guidance appointment for any saver accessing their pension pot under new plans announced this week in a bid to help prevent unintended, expensive consequences years later.

Savers will be offered guidance by Pension Wise, the historically underused government service set up to help individuals understand the pension options available to them and which suit their circumstances best.

Despite advice from an independent financial adviser remaining unaffordable for a huge proportion of long-term savers – those who would arguably benefit most from professional input – awareness of the free, impartial service remains stubbornly low.

Almost 15,300 pension pots worth in excess of £50,000 each were fully withdrawn in 2020-21, according to figures from the NFU. Almost two-thirds were taken without any advice – a dramatic rise on the year before.

Government figures suggest that only one in seven of those accessing defined contribution pension pots of any size took any advice beforehand.

“Savers now have total flexibility when accessing their hard-earned retirement pot, allowing people to take an income in a way that suits their lifestyle and personal circumstances,” says Tom Selby, head of retirement policy at AJ Bell.

“However, making the wrong choice – such as buying a poorly priced annuity or taking too much, too soon in drawdown – could have disastrous consequences.

“It is therefore critical that as many people as possible understand their options and the potential risks when accessing their retirement pot.

“Boosting take-up of official guidance from Pension Wise is a key part of that, as is promoting the potential benefits of taking regulated financial advice for those who can afford it.”

However, the proposals from the Department for Work and Pensions (DWP) only cover occupational pension schemes. Other workplace pension schemes and retail pensions are covered under different Financial Conduct Authority (FCA) rules.

“While the FCA opted to go with delivering the nudge when the customer applies to take a retirement income, the DWP enables providers and trustees to deliver it earlier,” Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, says.

“While the FCA did not preclude the possibility of providers deciding to deliver a nudge earlier, it set the point of application as its minimum which many providers may opt for.”

Behavioural trials for the Money and Pension Service show that the earlier the nudge comes in the decision-making process – before they have decided how and when to take their retirement income – the more likely someone is to use the appointment.

Meanwhile, despite enduring concerns over the confusion and subsequent rise in pension scams created by pension freedoms rules introduced in 2015 to allow savers to access their funds earlier and with greater flexibility, the Work and Pensions Committee has deemed the changes “a success”.

But it too called on the government to trial automatic enrolment to Pension Wise guidance – from the age of 50. At least 60 per cent of those accessing their pension for the first time should receive either guidance or regulated advice, the committee believes.

But the difference between the two terms isn’t clear either. Guidance refers to the presentation and explanation of a series of options or choices, often without cost and without the need to be regulated, while advice is a suggested course of action by a regulated individual or organisation, usually involving a fee for the service.

Crucially, if a saver takes professional advice, they are protected by law if that advice proves unsuitable, inaccurate or of poor quality.

Above all, though, those trying to save for old age despite the dramatic challenges thrown up by life and money in the here and now are still at huge risk of failing thanks to decades of layering new rules on top of old.

“Complexity is a significant barrier to engagement, and government is too often responsible for bamboozling savers with mind-bending new rules,” says Selby.

“The recent shambolic handling of the Normal Minimum Pension Age (NMPA) increase from 55 to 57 in 2028 and various changes to the pension tax rules over the years are obvious examples of Treasury policy that has made life more confusing for savers.

“We now have a pension system with three different versions of the annual allowance, seven lifetime allowances ‘protections’, and now potentially members who will have two different NMPAs within the same pension scheme,” he notes.

“Nobody in their right mind would design a pension system like this from scratch.”