Data from the Financial Conduct Authority has shown drastic changes in how consumers access their pensions since the introduction of the flexibilities, though experts have said difficulty accessing some options may have skewed consumer choices.
Exit charges: a patchy problem?
Following the chancellor's most recent summer Budget, the Treasury last month started a consultation into easing pension transfers and capping exit fees to help savers take advantage of pension flexibility.
However Tom McPhail, head of pensions research at investment platform provider Hargreaves Lansdown, said the numbers of providers charging exit fees was "patchy", and Adrian Boulding, then pensions strategy director at provider Legal & General, said the company had exit charges in place on only 1-2 per cent of its offerings – typically older ones.
"These are plans that were sold through a financial adviser and the way that advice was paid for was via small instalments up until retirement,” he said. Because some members will be looking to access their cash prior to their previously assumed retirement date, this means there could be a shortfall in this payment towards advice.
The body started the exercise in July in order to inform its policy work and its contribution to the Treasury's pension transfer consultation.
The findings – based on 107 responses from life insurers, investment companies and self-invested personal pension providers – will complement similar work by the Pensions Regulator on trust-based schemes.
Since the freedoms were announced in March last year, industry commentators predicted a sharp increase in people taking their pensions as cash and using drawdown products.
However some schemes have shied away from offering members access to all the options while they remain in the scheme, forcing them to transfer out to access the full range of options.
The FCA data, which covered the period April 6 to June 30, showed 77 per cent of savers needed to change contracts to access partial encashment drawdown, and 74 per cent had to change to access the tax-free lump sum.
Among the 15 largest providers these figures rose to 86 per cent and 81 per cent respectively.
In its analysis of the data, the FCA said: “This is consistent with a situation in which a large proportion of customers are in older pension schemes, where the existing contract is designed to provide customers with an annuity at the point of decumulation.”
Claire Trott, head of pensions technical at consultancy and trustee services company Talbot & Muir, said: “The systems aren’t set up for [the freedoms]. They’re for fully encashing your money or nothing.”
Alan Higham, independent retirement expert, said: “I do wonder to what extent the choice of product people are making was heavily skewed by what was readily available with their provider.
"I couldn’t share [the FCA’s] conclusion that these freedoms were widely available.”
Growth of drawdown
Despite this, partial encashment into drawdown has been the second most popular option among pension savers, with 53,543 of the 204,581 pension policies accessed in the period going into the product.
Each statistic represents a decision, is it a good one? It might be too early to tell, but that’s the really important thing
Tom Barton, Pinsent Masons
This lags behind only uncrystallised funds pension lump sums, which were accessed by 57,568 of policies.
Annuity sales dropped off sharply, as many predicted they would, with 12,418 sales compared with 89,896 for the same period in 2013.
Tom Barton, partner at law firm Pinsent Masons, said the data did not reveal some of the most important information for judging the success of the reforms.
“Did the FCA ask the right retirement questions?” he said. “What hasn’t really come out is what’s the money being used for and why, and whether taking money out of the system is a good direction.”
He added: “Each statistic represents a decision – is it a good one? It might be too early to tell, but that’s the really important thing.”
Transfers
The FCA's data shows the average time taken to transfer benefits out of a scheme is 16 days from the member's initial request to transfer to the point the funds leave the scheme.
However, many providers refuse to permit transfers from defined benefit pensions. The analysis found 19 per cent of providers do not accept transfers.
Some of the reasons for refusal were the suspicion of fraud, due diligence concerns or concerns over whether the size of the fund combined with charges would make the transfer economically detrimental to the customer.
Evolution of Pension Wise
In the same week the FCA published its findings, Treasury secretary Harriet Baldwin announced responsibility for the delivery of guidance service Pension Wise would move from the Treasury to the Department for Work and Pensions from March next year.
Higham said the move was a welcome one. "The Treasury isn’t really geared up for operational delivery of pensions matters. In terms of delivering a consumer-facing service it’s much more natural for the DWP.”
Rona Train, partner at consultancy Hymans Robertson, said: “It makes sense for everything to be under the DWP. It didn’t seem a natural place for it to be sitting under the Treasury.”
However, Trott said the service could have benefited from more time to bed in.
“I don’t think it’s up and running enough to start moving government departments yet,” she said.
