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Change advice rules to help customers choose pension withdrawals

Recent policy interest in pension freedoms has revealed what looks like a new consensus between stakeholders. The Work & Pensions Committee inquiry into accessing pensions is focusing on advice and guidance, and its witnesses seem to agree that this is the right place to look. Where once a sizable camp called for retirement defaults, it is now clear that supporting people to make choices is key to good outcomes. This chimes with the ABI’s new report on pension withdrawals, which reviews the landscape in light of investment pathways.  

Person canoeingThe basics are obvious (and were true before April 2015): DC savers must choose when and how to access their pensions; to do so, they need more help from providers and schemes, with a big role for Pension Wise and now MoneyHelper; and government must act to make these things happen.   

Next, it’s important to pin down the detail. It’s not a question of giving people information and helplines and telling them to make a choice, it’s changing processes to make those choices simpler.  

As an example, investment pathways require non-advised drawdown customers to choose one of four options reflecting their pension intention in the next five years. Early ABI data suggests pathways are being used as intended, with people choosing a range of options. Similar numbers of customers using pathways chose the option, “I have no plans to touch my money in the next 5 years”, and “I plan to take out all my money within the next 5 years”. This shows that a single default would have been wrong for many.  

Investment Pathways table

While investment Pathways are not perfect – they are prescriptive and not right for everyone – they, or something similar, are necessary. We see no reason why DWP does not follow FCA’s lead and introduce them for occupational schemes more or less as they are. No-one, however, is saying that investment pathways are sufficient. They do not address the key remaining challenge in helping people to navigate pension freedoms: when and how much to withdraw.  

People benefit from a rich diversity of ways to approach their retirement, out of necessity or preference. To match that diversity, pension withdrawals need to be flexibile. The definitive and official qualitative research on people’s experience of pension freedoms, by NatCen for DWP, found that customers’ rationale for accessing pensions fell into four broad categories:  

  • To top up income 
  • To support adult children  
  • To invest in other plans for financial security in retirement 
  • To fund imminent or current retirement or semi-retirement 

Pension freedoms cater for that breadth of experience. But without doubt, customers need much more support to be able to make the most of those opportunities (and they also need much more money in the average DC pension, but that’s another story). 

The ABI’s new report on pension withdrawals finds that firms already have a range of approaches in place to help customer decision-making: from regular customer communications beyond the regulatory requirements, to stronger interventions if someone is at risk of exhausting their pot. But many would like to go further still to support customers and prevent detriment. 

There is potentially most detriment when customers take their entire pension as a lump sum, especially if it is simply left in cash savings – it was estimated by LCP last week that savers have lost out on £2bn in returns in this way. A single lump sum is still the most common way that pensions are accessed, despite most of the regulatory focus being on non-advised drawdown; it’s important not to ignore this issue and to consider the customer journey that leads to this choice.  

There could also be detriment from doing nothing, with 6.5m DC pots held by over-55s left untouched among ABI data providers. We don’t know enough about customers who do nothing, and some will be untouched because they have been forgotten or because the choices are perplexing. However, it is reassuring that NatCen found that those who left their pots untouched viewed, or partly viewed, their funds as a source of retirement income rather than a lump sum to be accessed.  

What could providers do to support customers’ withdrawal decisions? Our report suggests that this support could include doing more to harness the potential of digital communications, showing the impacts of different withdrawal strategies. It could include adding their own choice architecture, setting out what a sustainable withdrawal rate could look like based on the customer’s circumstances. And it could include putting up guardrails to protect customers from poor outcomes, based on preferences they agree with the provider at outset.  

But the above examples get very close to the advice boundary: filtering options or setting out a course of action based on a customer’s circumstances feels like a personal recommendation. But not having such support risks greater harm to customers. We’d like to see new forms of advice and more people getting help earlier from Pension Wise, and MoneyHelper more widely. It also needs changes to FCA rules and guidance, and potentially to legislation to enable personalised guidance, allowing providers to do more and be confident about it.


Last updated 12/07/2021