Sara Benwell analyses Channel 4’s Dispatches on pensions freedoms and finds it over-dramatised
Last night Michael Buerk, most recently of ‘I’m a Celebrity, Get Me Out of Here!’ fame, led a Channel 4 - Dispatches documentary on the new pensions freedoms.
It was, in many ways, a story of two halves. On the one hand concerns were raised that pensioners will all blow their retirement savings and on the other we were told that people who will be stuck with annuities are being dealt an unfair hand.
At times the programme was confused, inadequately distinguishing between defined benefit and defined contribution pensions, and the ways the freedoms apply to both. It was also quite inflammatory; you’d be forgiven for reaching the end of it convinced that entire pensions industry was robbing you blind and ready to collapse.
Despite this, it did raise a few important concerns, albeit with caveats.
1. Will we all spend our retirement money?
This was the centrepiece concern for the documentary. In a move Buerk describes as “a national experiment that’s never been tried before”, the new pensions freedoms will mean, in theory, that those entering retirement after April this year will be able to access their pensions however, and whenever, they choose.
Of course, the experiment has been done before, just not in the UK. Australia has had similar freedoms for some time now. Worryingly, the interim report of the Murray Review noted that in Australia, “around one-quarter of people with a superannuation balance at age 55 have depleted their balance by age 70”. So at first glance, Dispatches’ concern seems valid.
The documentary points to a Scottish Widows survey, which found over half of those aged over-55 said they intended to take some or all of their money out of their pensions.
At first glance this seems alarming, but it is important to note that countless studies have been done to predict what people are likely to do at retirement following the new freedoms, all with different results.
Oddly, the vast majority of these stories tell a rather different picture. IFA firm Portal Financial found that 65% of people are absolutely sure they will notbe cashing in their pension. Of the 9% the company found would choose to take the cash “it is often because they have a pressing need for the money, with very little sign of frivolous spending.”
Likewise Aon Hewitt found that only 5-10 percent of DC savers expect to cash in. Furthermore, when people were questioned on the kind of income they would like in retirement “nearly 70 per cent expressed a desire for a “steady, secure income”, where they will not outlive their retirement savings – an annuity in all but name.”
At best, all this can really prove is that people aren’t quite sure what they will do, but the balance is certainly tipped in favour of Brits being more cautious than Dispatches would suggest.
2. Will the new freedoms lead to more pensions liberation fraud?
This is a concern raised by many in the industry, particularly when there is a lack of clarity around the guidance guarantee. What last night’s documentary failed to pick up on is the distinction between DB and DC schemes. DB scheme members who want to access the new freedoms, will have to transfer their pensions to DC schemes. In order to do this, the government has said that members will have to take regulated financial advice. There are some questions about how this can be enforced in practice, but there has at least been some thought given to the issue.
For DC members, on the other hand, the threat is real. Dispatches pointed to research from the Phoenix Group, which found that almost half of those with a pension said that they had been approached asking if they want to review their pension or release some of it as cash.
For DC members the threat is real”
This threat is exacerbated by a lack of clarity around the guidance guarantee, particularly given wake up packs for those retiring in April will already be going out.
What Dispatches doesn’t mention is that in a world of multiple jobs, and therefore pension pots, a half hour call to work out your options almost certainly won’t be enough. Furthermore, in the wake of the retail distribution review, independent financial advice is costly and won’t be seen as an option for many.
3. The annuity trap
Somewhat surprisingly, given the programme’s concern we might all run out of money, it spends a great deal of time looking at whether those who have already bought an annuity are being treated unfairly.
While Steve Webb has just announced that he wants to allow people to sell on existing annuities for cash, the industry has responded pretty negatively. As Alan Higham, retirement director at Fidelity Worldwide Investments puts it on the programme, “My gut feeling is if you’ve been sold an annuity by your existing insurance company, I think you’ll probably be stuck with it.”
More interesting was the programme’s focus on those who will still be pushed into buying an annuity after the reforms. Buerk points to one major insurer, whose welcome pack to members suggests that if they do not get in touch, they will be sold an annuity by them.
My gut feeling is if you’ve been sold an annuity by your existing insurance company, I think you’ll probably be stuck with it”
These people will be in DB schemes, since they’re receiving a wake up pack from an insurer, so the freedoms are not really aimed at them anyway. Should they want to access their cash, they will need to transfer their scheme under the advice of an IFA, so it is not so surprising that they are being steered towards an annuity. What Dispatches failed to consider is the huge number of DC savers with a provider who does not offer drawdown. These people may well find themselves with an unwanted annuity.
4. Will the new freedoms end up being a massive burden on the state?
Coming back to the concept that people may fritter their pensions away, Dispatches questions whether the new freedoms may lead to a huge number of people relying on the state for their livelihoods.
Admittedly, if this were a likely outcome, it would be of great concern. However, given the number of people looking to take all their pensions as cash seems likely to be small, it’s not as worrying as Dispatches would have you believe.
Equally, the programme fails to account for the people for whom taking the majority of their pension as cash is probably a good outcome. These include people with pots smaller than £10k, where an annuity would be tiny anyway, people with pots in excess of £200k who will likely have access to financial advice, and those who also have a DB scheme to provide an income in retirement. For these sets of people, taking their pension funds as cash will have little or no impact on the state whatsoever.
DC members are planning to use a variety of other sources, including ISAs to fund their retirement”
It also fails to consider potential other streams of retirement. A research report from Aon Hewitt, Cass Business School and YouGov found that DC members are planning to use a variety of other sources, including ISAs - 39 per cent of people - and property downsizing - 19 per cent - to fund their retirement.
The next generation
As auto-enrolment marches on and the amount of money in DC schemes overtakes that of DB, many of these concerns will become more pronounced. With no DB scheme to fall back on, and most only saving the minimum auto-enrolment contribution of 1%, there may in the future be a generation who have nothing to retire on but their state pensions if they burn through their pension pots too early.