The background to this really is that there’s been a lot of growing concern, I think since freedom and choice came in, that perhaps people are making choices that are not the best choices possible. Contributor Jonathan Watts-Lay, Director – WEALTH at work
And some of the background to that is there’s a lot of evidence that people are cashing in their pension pots completely. And that might be that they’re just cashing in one pot, and they’ve got another five or six pots, so that’s not particularly clear. But also we know that the tax take from the Treasury has been bigger than what they actually forecast. So clearly people were doing things and paying tax, and maybe they needn’t pay that tax. So there’s a general concern about what people are doing.
And so one of the recommendations from the Work and Pensions Select Committee was that actually there should be defaults for decumulation. So basically when someone gets to the point of retirement, if they don’t make an active decision then they will actually go into a default, and they will draw their retirement income from that default. But there’s a bit of a concern around that, because that’s clearly in a provider’s interest. Because if it’s in your existing pension provider then those assets stay with that provider. But the big question mark is, is it actually within the consumer or the member’s interest?”
“I think there are a number of risks. The first one is probably that there’s a danger that freedom and choice almost gets destroyed by defaults, because actually people don’t go out and make active decisions around the choices that they have. They just end up in a default. And we have been there before. If we go back to pre-freedom and choice, most people had to buy an annuity, and yet we know that when they bought an annuity a large number of them bought it from their pension provider, albeit they could have got a better deal elsewhere. So we’ve kind of been here before.”
The impact on individuals
“I think ultimately it means that they don’t shop around, which is the key thing. They just end up defaulting into whatever is being provided by their pension provider, or indeed pension providers. So they don’t shop around, and the impact of them not shopping around is really that they end up with potentially less money every month in their pocket in retirement than could have been the case. I think there are also other issues as to how would defaults actually work in practice. So is the pension provider just going to be sending a letter to that member saying, ‘right you’ve now reached your stated retirement date, send us your bank details and we will start paying you income.’ Because if there is no guidance, no advice, then that would be very easy for someone to go, ‘OK well I’ll provide my bank details.’ But of course again if they’ve got five different pensions, and they do that to all of them, then actually what retirement strategy have they ended up in?”
“Well I think rather than talking about defaults, we should actually be talking far more about guidance at the very least. So if we’re going to make the most of freedom and choice, then really people need to understand what their options are. They need to understand generically what the advantages and disadvantages are of those options. And then it will allow people to make a choice to either say ‘yeah, no I am happy to go into the default’ or ‘no, actually I want to look at another option’. And one of those options may be, ‘I want to go and get some regulated advice, because I feel as though I need support in making that decision so I make sure that it is the right decision.’ And I think only by having that guidance in place will people be able to make informed choices, and therefore have better outcomes.”