(Pension) Freedoms at what price?
I wonder how many of our clients have, through lockdown, spent their time lovingly polishing their Lamborghinis and enjoying the fruits of their labours (when they were able to drive more than two miles) and hard-earned pension funds. Of course, this was the rather tongue-in-cheek image painted by the Pensions Minister Steve Webb back in 2015. At that time, he said individuals should be free to choose how to spend their pension funds. First announced in the 2014 Budget, fundamental changes were brought in under the banner ‘freedom and choice’ in pensions.
The changes were deep rooted and allowed all individuals the flexibility to access their pension from age 55 with no requirement to purchase an annuity, that is, a guaranteed income for life. The pensions industry loving nothing more than a new acronym suddenly found two: FAD (flexi access drawdown) and UFPLS (uncrystallised funds pension lump sums) falling under the equally snappy banner of ‘pensions decumulation’.
For a typical saver this did not provide the panacea of buying a Lamborghini at age 55 but it did offer freedom and choice, but at what price? You may all remember, during and after the credit crisis, when maximum pension income was driven by GAD (government actuary department) rates, we saw massive reductions in allowable income due to a combination of the squeezing of gilt yields and a drop in asset values. Was this the correct thing to do then? What would have happened if the rules that apply today had applied then?
Five years on, the Financial Conduct Authority (FCA) presented its business plan for 2020/21 setting out five key priorities over the next three years. One of those centres on ‘enabling effective consumer investment decisions’, commenting:Pensions and retail investments allow consumers to build long-term savings and provide an income in later life. When these sectors work poorly, consumer losses from unsuitable investment decisions, or fraud, can be catastrophic. Consumers who are scammed lose an average of 22 years of pension savings, almost three times their annual earnings. ¹
Perhaps the timing of this is coincidental. Many individuals will have experienced significant falls in value on their pensions because of the COVID-19 pandemic, so it’s only natural that investors will question whether they have made suitable investment decisions.
From an advisory perspective much will come down to how well the client’s objectives have been identified, coupled with an intimate understanding of the client’s attitude to investment risk and capacity for loss. This goes beyond the typical form-filling to give a generic answer. It means interpreting the client’s responses and putting in place an investment strategy that not only meets their attitude to risk but also helps them achieve (other than a Lambo) what they set out to achieve at the start.
Of course the pandemic may have now changed many of our clients’ attitudes to taking risk and indeed their objectives. As advisers we need to be fully cognisant of this as we work through the next few years of recovery to ensure investments remain suitable.
Latest figures indicate that £35 billion of taxable payments have been made since pension freedoms arrived². It is anticipated in the coming decade that 9 million people are set to enter the pension freedoms environment³. Unless things vastly change (again), one thing is for sure: pressure will be on the financial services sector to deliver suitable results within a hugely flexible, practical environment with more scrutiny than ever from the regulator and our clients.
Michael Hulse is a Chartered Financial Planner at Mattioli Woods.¹
Source: Financial Conduct Authority Business Plan 2020/21
² Source: HM Revenue & Customs ‘Flexible Payments From Pensions’ April 2020 Official Statistics
³ Source: www.ons.gov.uk/