Savers are struggling to navigate the “pensions minefield” and need more support to make well-informed decisions, according to MPs
A target should be set of least 60% of people using Pension Wise or receiving paid-for advice when accessing their pension pots for the first time, the Work and Pensions Committee urged.
It said Government and regulators must “end their timidity” to help savers avoid making poor decisions and in some cases ending up as victims of pensions scams.
Pension Wise helps people aged 50 and over to make sense of their options, offering free, impartial guidance.
The committee said: “We recommend that the Government sets a goal for the Money and Pensions Service for the combined use of Pension Wise and paid-for advice when accessing pension pots for the first time.
“This goal should be at least 60% and expressed in terms of individuals rather than pots. It could include an exemption for smaller levels of saving.”
The committee added that automatic appointments with Pension Wise should be trialled, to help support people to make better decisions.
There should be one appointment when a person accesses their pension for the first time and also one at the age of 50, before they can access their pension savings, the committee suggested.
The pension freedoms, introduced in 2015, give people a much wider range of choices over what to do with their pension, rather than being required to buy a retirement annuity.
The Committee said that, although Pension Wise offers a good service, not enough people use it.
During an inquiry, the Committee was told by the Financial Conduct Authority (FCA) that consumers describe pensions as a “minefield”, with even those who felt financially confident in other aspects of their lives struggling to understand how pensions work.
Stephen Timms chair of the Work and Pensions Committee, said the pensions landscape “is in a constant state of change”.
He said: “It’s little wonder therefore that – as the Government’s own financial regulator recognises – people struggle to navigate the pensions minefield.
“When the 2015 reforms were introduced, the Government guaranteed that savers would be given the tools they needed to take advantage of the new range of options and make well-informed decisions. Seven years on, guidance remains the missing piece of the pension freedoms jigsaw.
“Nudging savers will not be enough. The Government and regulators can no longer just sit on their hands as decision making becomes ever more complicated.
“They must end their timidity and be much more active in supporting people as they approach retirement. We know that those who use Pension Wise find it useful and often make different choices as a result. Every effort should be made to boost its use.
“Without intervention to drive up dramatically the numbers receiving advice and guidance, savers will make poor decisions – and, in far too many cases, become scam victims – and the pension freedoms, far from living up to their name, will instead trap people in an increasingly confusing web of complexity.”
The FCA should look to increase the number of people choosing a mixture of retirement products which could benefit them, the report suggested.
For example, someone may benefit from withdrawing a lump sum when they first access their pension and at a later stage in their life choose an annuity, which guarantees an income.
The pensions advice allowance, which allows £500 to be withdrawn from a pension up to three times in different tax years for advice, should also be overhauled with the annual limit removed and the Money and Pensions Service and advisers encouraged to signpost its use, it said.
Commenting on the report, Phil Brown, director of policy at B&CE, provider of the People’s Pension, said: “More must be done to help savers understand risks such as longevity and inflation, as well as how investments work.
“Although Pension Wise is a very good service, it isn’t the only solution to this problem and providers need to develop products which will help retirees safely spend their money, while optimising the way they continue to save during retirement.”
Laura Myers, a partner at financial consultancy LCP (Lane, Clark & Peacock) said: “For many savers the most attractive feature of saving in a pension is the ability to take 25% of the pension pot in the form of tax-free cash.
“The problem is that far too little attention is given to what happens to the other 75%.
“This can end up in a poor value drawdown product or, worse still, be fully withdrawn and sit in a current account or cash Isa with ultra-low returns.”
Baroness Ros Altmann a former pensions minister, said: “Helping more people understand pensions and making them work better through retirement can also help improve the reputation of pensions, encourage more people to leave their money invested for longer and ultimately have more money in later life, rather than rushing to take out money as soon as they can and possibly paying unnecessary tax.”
Yvonne Braun, director of long-term savings at the Association of British Insurers (ABI) said: “Decisions about accessing a pension are some of the most complex financial decisions people make in their lifetime, and many savers will be unsure of the best course of action.”
A Department for Work and Pensions (DWP) spokesperson said: “We are committed to ensuring people have the support and information they need to make informed choices about their financial futures, striking the right balance between providing vital protections and informing pension savers, while also giving them freedom and choice about how to use their hard-earned pension savings.
“Our stronger nudge measures will require pension scheme trustees to offer to book a Pension Wise appointment for a saver, unless they actively decide to opt out of receiving guidance through a separate communication.
“Since November, our new transfer regulations have bolstered protections for savers by empowering trustees and scheme managers to halt a transfer request where they suspect it could end up in the hands of a fraudster.”
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