Reports are emerging of investors experiencing problems accessing their retirement savings in the wake of the launch of the pension freedoms.
Tom McPhail, Head of Pensions Research: “The pension freedoms are working well for many investors; thousands have been able to access their retirement savings without cost or delay. Some pension providers, such as Hargreaves Lansdown (and a few others) have been able to offer investors ready access to their retirement savings from day one and to provide them with all the necessary products, tools and information to make informed retirement income decisions. “
“Given the speed with which the reforms were introduced, it was always likely that some companies would struggle to be ready in time. Investors with these companies should be given the freedom to transfer their money elsewhere without having unnecessary barriers put in their way. Insisting that investors pay hefty exit penalties, use a financial adviser that some may not need, or jump through bureaucratic hoops is simply not reasonable or fair.”
Hargreaves Lansdown has already successfully dealt with thousands of pension investors, arranging drawdown, and annuities and making lump sum payments. We have also provided investors with a wide range of supporting tools and information to assist them in managing their retirement savings. We are the proof that it can be done.
What should pension investors do?
Plan ahead. If you are intending to access your retirement funds, contact your pension provider in plenty of time. There may be a lot of paperwork and delays involved; some companies may insist you speak to a financial adviser first.
Talk to Pension Wise; it is a free and helpful service. If your pension provider can’t or won’t help you, consider moving your money to an alternative provider. Some companies (such as Hargreaves Lansdown, though others are available) are able to allow you quick and easy access to your cash.
Check how much tax you might have to pay; also check how much emergency tax will be deducted as this could be a different amount. Online tax calculators are available. Consider your long term retirement prospects, including inflation risks before dipping into your pension; check you will have enough money to last for your retirement. Consider all your pension options, including drawdown, ad-hoc lump sum payments and yes, even buying an annuity. Research shows that over 70 percent of investors regard a secure retirement income as quite important (34.6 percent) or very important (37 percent) (Source Hargreaves Lansdown retirement survey of 1100 investors 2015).
For short-term and one-off spending needs, consider accessing alternative sources of funds; your pension fund is tax free and so should be drawn on sparingly.
If you’re thinking of transferring a final salary pension to get at the money, you’ll probably pay a hefty price and will also have to pay an adviser a fee which could run to over £1,000.
Talk to your partner or spouse before acting; this could prevent awkward conversations further down the line. Review your investment options; once you start tapping into your retirement savings, you may need to change some of your investment choices in your pension.
What should pension and insurance companies do?
Quite simply, if you can’t offer your customers the pension freedoms, then make sure they can leave and access the freedoms elsewhere with a company that can help them. Transfer costs should be no more than a nominal administration fee and should be completed with a matter of a few days.
What should the government do?
Acknowledge that elements of the pensions industry were never going to be ready in time; the timescale of these reforms was always going to be a challenge for some. The critical test for those companies that aren’t ready is whether they are allowing their customers to go elsewhere. Look at the option of price-capped investment choices for drawdown. This is not a substitute for making sure investors engage with and understand the risks, however it could set a benchmark. Make sure occupational money purchase pension schemes offer the same freedoms to their members and are subject to the same regulations.
Recognise the importance of good investor communication and engagement. This will help pension investors to understand and mitigate the risks posed from drawing a retirement income from an investment fund.
What should the FCA do?
Clarify the regulations around retirement income withdrawals as quickly as possible. The FCA too has had to deal with the speed with which the reforms were introduced. It has introduced temporary regulations in the form of the Second Line of Defence; it needs to move on from here as quickly as possible. We are expecting a consultation in due course.
Rewrite the retirement communication regulations to ensure they are as simple as possible. This means introducing the Pensions Passport so that investors have access to the relevant information without being bogged down with unnecessary paperwork. Look at the supporting information requirements that could sit alongside providing income withdrawals (such as tax, investment choices, life expectancy, annuity comparisons etc). Continue to promote shopping around and the exercise of informed choice as the best path to making good retirement income choices.