We are fast approaching at the second anniversary of the pension freedoms and the removal of the requirement to buy an annuity (officially that is – the real compulsion went several years before). In that two years the focus has been on the numbers – what has been cashed, how much tax has been generated, what product options are popular and very little on how the money has been spent.

The wheels have not yet come off but I think it is important that we keep the policy in review to make sure that short-term gains of flexibility do not turn into long term horror stories!

In some ways the pension freedoms regime flies in the face of what pensions are intended for, the idea being that the Government gives incentives in the form of tax relief so that people can save a secure stream of income for life, keeping the same people off state benefits whilst also allowing consumption and taxation back into the economy in the future.

The removal of the need to provide any guaranteed income was a brave step, perhaps driven more by short-term political aims rather than a real consideration of how an ageing society will support itself in the future. If we look around there have been a number of warning notices as of late.

In a recent report the Organisation for Economic Co-operation and Development (OECD) showed some concern that “there will be people who are not covered against longevity risk” due to the pension freedoms. Indeed in their 2016 pension review they suggested that part-annuitisation is actually a desirable feature of a pension and retirement regime.

The OECD presents the issue more as a ‘potential’ problem for the future, however, if we want to see how this could work in practise then we need only to look to Australia. Australia has had ‘pension freedoms’ for a number of years and, as in the UK, it is possible for a pension holder to cash in their pension (tax free) with no requirement to buy an annuity.

There have been stories of pensioners spending their money too quickly and then having to return to work in their eighties. Perhaps more surprisingly there have been stories of pensioners spending their money too slowly (‘reckless conservatism’) as they are scared that their pension funds could run out before they do. The transfer to the individual of the decision of how much income to take has caused what some would refer to as the ‘Goldilocks Problem’ – how much is too much, how much too little and how much is just right?

In the UK there have been a number of articles on ‘safe’ rates of withdrawal but they are always based on a variety of complex assumptions and are very difficult to understand without financial advice.

So, is the solution a return to annuities?

I believe annuities should have a role in the spectrum of retirement solutions but it is difficult to ignore the features of income drawdown. Australia is looking beyond annuities and there is an ongoing consultation considering a new approach (‘Development of the framework for Comprehensive Income Products for Retirement’), which looks for a new form of product, perhaps incorporating some form of pooled solution with the option of guarantees. Likewise in the UK, the Pensions Institute published a detailed paper in March 2016: ‘We Need a National Narrative: Building a Consensus around Retirement Income, which addresses similar issues.

The pension freedoms policies will be tested by time. If we want them to succeed we must make sure that we learn lessons and adapt accordingly.

Mike Morrison
Head of platform technical