The FCA report on the use of Pension Freedoms – sad but not shocking.

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The data that the FCA supplied last week about the choices people are taking with their retirement savings isn’t surprising – but it’s still shocking!

Nearly nine in ten savers accessing their retirement pots under the pension freedoms are using new flexible arrangements

Just 13% of savers are now buying annuities to turn their fund into an income in retirement.

More than two-thirds of pots accessed by savers between July and September were fully cashed out.

Here’s the raw data…

A total of 178,990 pensions were accessed during the three-month period, and 68% of these, amounting to 120,969 pensions, were fully encashed.

The remaining 32% of pensions that were accessed were taken to provide an income.

Most (88%) of the pensions where the money was fully taken out were worth less than £30,000.

£17m a day is being withdrawn under new pension freedoms


What’s shocking?

To put it bluntly, it’s shocking that nearly 90% of pension pots assessed were worth less than 90%. The promise of the portable pension didn’t arrive.

The analysis covered 95% of the monies arising from personal pensions (contract based plans) and they simply didn’t deliver what they said on the tin. Let’s be clear- when people signed up for one of these personal pensions, they would have been given an illustration of what the likely benefits arising would be. I doubt that many (if any)  projected less than £30,000.

The assumptions on these plans were based on a continuos contribution history as certain as tax and national insurance. There were no illustrations of the actual what ifs…

What if I change job and my new employer won’t pay into this pension (like my current one does)

What if I fall on hard times and have to stop saving….

What if I lose touch with my current financial adviser and have to start another pension to pay the fees of the next one…

I could go on… The insurance companies who run these supposedly portable personal pensions have known since the early 90s that “persistency rates” were shocking. That people would pay a few contributions into a pot and then move on , starting another personal pension and another.

Many of these plans were forgotten about and form part of the great estate of “orphan assets” which benefit no-one but the insurance companies who continue to draw their charges against pots diminishing in real terms.

When people say that pension are a rip off, this is where they point to for evidence. These broken promises they received from pension advisers backed up with statements from properly branded insurance companies stick in people’s memory. The advisers are gone, many of the insurers are gone, people are now happy to salvage what they can from the wreckage.


It’s not shocking that people aren’t buying annuities

This graph from the Daily Telegraph shows  that between 2003 and 2015 the amount of income has fallen by over a third. The fall is even steeper if you compare 2008 and 2015.

Annuity rates over the past 10 years for buyers aged 60 (dark blue), 65 (blue) and 70 (green)

Based on a single person with £100,000


People see the accident of “getting lucky” or “being shafted” by annuity rates as a trick played on them by people in the City. They aren’t particularly interested in explanations about quantitative easing, low growth forecasts or financial crisis – what is that to them?

They look at insurance companies as insuring them against bad things happening, not exposing them to these kind of risks.

For the 90% of people who escaped having to buy an annuity at ridiculous rates, the pension freedoms are good news not bad. Money salvaged from the wreckage.

 Should we be surprised that people won’t take financial advice?

Most people were coerced into these personal pensions by financial advisers. Most people know that financial advisers mad a lot of money from their “sales” and that there is a link between the commissions they earned and the lower than expected cash values of their pensions at retirement.

They are now being told that they should take more financial advice. Unsurprisingly, people see little point in returning to the scene of the crime where they understand the people who robbed them last time around are waiting for them.

They have landed on the monopoly square that tells them to go directly to “go” – collect £200. That’s what most people will do, are doing and have done ever since they’ve had a chance.


Many people see Pension Wise as spies.

When I say “most people”, I mean most people who haven’t got the financial literacy or the inclination to go to Pension Wise. People have nothing to lose by going to Pension Wise One person I spoke to over Christmas told me he

“didn’t fancy going to the Citizens’ Advice Bureau as the people there “didn’t know anything they didn’t – the people there were Government spies-and that anything he told them would prejudice his chance of getting benefits in the future”

He had been told this by his friends. I am sorry to say that most of the people at the bottom end of the “socio-economic scale” are extremely careful about sharing anything with Government and this chap was acting under orders.

Hand wringing is not much use

It was sad to read in Katie Morley’s article in the Telegraph, comments by Joanna Elson, chief executive of the Money Advice Trust, the charity that runs National Debtline.

“No-one wants to see retirees run out of income and face debt in later life – but these figures show that many could face this worrying prospect.

“We have also raised concerns that retirees who are already in financial difficulty could be left without the information and advice they need to choose the best pension products for them.

“While general guidance is available from Pension Wise, many people with unpaid debts and smaller pension pots will struggle to afford professional product-related advice.”


Taking care of those who cannot care for themselves.

Those in financial difficulty do not have “pension products” designed for them. The graph on annuities took as an annuity purchase value £100,000. Of those who are buying annuities (the 13%) , two thirds bought from their providers- suggesting that old habits die hard and there is a hardcore of people so reliant that even the open market option looks too hard.

That 64% of people buying annuities didn’t shop around tells me that there is still vulnerability at the bottom of the market. I’d like to see a further study to find out why these people bought into annuities as they did.


The best pension product for those with small pots?

Quite clearly, the State Pension is what most people cashing out pension pots under £30,000 are going to rely on. As Paul Lewis calls it- it is their Pension Lamborghini. Were we able to liberate it – it would buy as a Lamborghini!

Were people taking their pots at state age able to access professional financial advice, they might be best advised to defer taking their state pension and use the money from their pension pots as a bridge. They might be well advised to buy extra state pension rather than sink the money into an annuity. The State Pension is a brilliant pension product and the options to defer and purchase more are rarely advertised (especially to those on low incomes)

We should right now be working on a mass market way to help people with small pots to spend their saving but that work was put on hold earlier this year when the Government mothballed CDC.

This is not the time to rehearse why this was such a short-sighted decision. But now is the time to draw a conclusion from the FCA’s findings.


What can we make of all this?

  1. It is shocking that personal pensions have come to this, almost 30 years after they started out, they are simply not delivering to those they promised so much to
  2. The behaviours of people cashing out their personal pensions is not shocking- it is entirely understandable
  3. The failure of the Government to do anything to help those with small pots to find a better way to spend their money than annuities and advised draw-down is a disgrace.

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to The FCA report on the use of Pension Freedoms – sad but not shocking.

  1. Peter Weiner says:

    2016 and still the typos come – ‘nearly 90% of pension pots assessed were worth less than 90%’!. Sorry, Henry, I’m still here.

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