Tim Sharp: How do we judge the success of pension freedoms?

No longer would most defined contribution savers be forced to buy an annuity, an insurance policy giving them an income for life, on retirement.

Remarkably, we do not know exactly how much has been taken because initially providers weren’t obliged to report the numbers.

We have only a vague idea where this money has gone. Surveys suggest that home improvements and cosmetic enhancements, as well as cash savings accounts and income drawdown products, a means of gradually taking cash, have been popular destinations.

For the government, there has been a £2.7 billion tax bonanza, three times what was anticipated.

So at one end of the pensions system we have the highly successful auto-enrolment initiative bringing much needed contributions into pensions.

But at the other, Osborne pulled out the plug, and funds are pouring out.

Shifting opinions

How do we judge the success of pension freedoms? One recent study of those who had accessed pots of up to £250,000 found most were happy with their choices – even if they had already spent most of the proceeds.

But much suggests that opinion could turn over time.

One industry survey found that a majority of those using an income drawdown product, a means of taking cash out of a pension, thought it was guaranteeing them an income for life. It does not.

Getting advice

The combination of product complexity and consumer inertia that led to so many getting a poor deal from the annuity market have been replicated with drawdown. Citizens Advice found that seven out of ten people accessing their pension savings did not shop around.

And, consistently, people report that an income for life is their priority on retirement. They just don’t know how to get one.

Few use the Pension Wise guidance service. Even fewer take financial advice.

This is bad for savers, who are already struggling to amass savings for retirement. And bad for employers who want those who are ready to leave the labour market to have the funds to do so.

But given that the old system also had great flaws, how do we help savers navigate their finances through what could be decades in retirement?

‘Nudge and inertia’

There is a strong case for replicating in decumulation the tools of nudge and inertia that work so well in the accumulation phase.

It is time to develop default pathways that present savers with a good value route to generating a lifetime income. That could be through an optimal mix of drawdown and annuitisation, perhaps with some access to cash.

Sadly, the government recently declined to allow state-backed NEST to provide such a default. The market will provide, it concluded, in face of decades of experience showing market mechanisms in pensions are particularly ineffective.

A good pensions system isn’t just important for workers; employers want to know that the money they contribute is going to good use. So it is incumbent on employers, and any interested in a coherent pensions policy, to press for retirement provision that works.

Tim Sharp is pensions policy officer at TUC