Pensions are fighting a losing battle against consumer products and we should be deeply concerned, says Sara Benwell
When the pensions freedoms were first announced, the pensions minister at the time, Steve Webb, cautioned that we could see pensioners blowing all their savings on a sports car. Little did we know - that would be the least of our worries.
Almost a third of people with pensions worth more than £100,000 are taking advantage of freedoms to put their savings into a bank account, according to research from Citizens Advice.
This is an unmitigated disaster.
When the rewards outweigh the risks
One of the explanations for this mad dash for cash is that people are wary of the risks associated with investing. The report noted: “This trend of transferring pension savings into bank accounts is partly a response to low annuity rates and the perceived risks of investing in financial markets. So with increased uncertainty in markets following Brexit, this could become a popular option.”
Savers with NatWest received a nasty shock when the bank revealed that it would be slashing rates on its cash ISA”
This suggests retirees are unaware that the returns they can receive in a pensions outstrip those available in a bank, even in times of volatility.
In fact, cash savings products, ravaged by persistently low interest rates, are reaching all-time lows. Following the Bank of England’s decision to cut the base rate from 0.5 to 0.25%, savers with NatWest received a nasty shock when the bank revealed that it would be slashing rates on its cash ISA to 0.01%.
That rate goes up the more people choose to invest, but the top rate (for those saving £100,000+) still comes in at a meagre 0.5%.
And NatWest is not the only one. The Sun reported that close to 300 savings accounts reduced returns in August.
Despite this, people are choosing to remove their money from workplace pensions products, which have returned between 3.5% and 9.5% per annum over the last few years to put their cash into these low interest accounts.
For many retirees, losing out on pensions returns will be the least of their worries. Switching money into a bank account or ISA could see pensioners being hit by unexpected tax bills or welfare reductions.
Andrew Pennie, head of Pathways at Intelligent Pensions, said: “The findings of the survey are disturbing and another indication that there is still a huge amount to be done if pension freedoms are to be the success we all want them to be.
It’s genuinely shocking that a third of those surveyed with pots over £100,000 are cashing out”
“While we anticipated a lot of people with small pots would cash-out, it’s genuinely shocking that a third of those surveyed with pots over £100,000 are cashing out and keeping their money in the bank.
“Not only is this likely to result in a poor outcome from a tax perspective but completely fails to address the need to provide a sustainable retirement income against the risks of living too long and the effects of inflation.”
The report revealed that overall 9% of people had unforeseen tax problems- such as tax deductions they weren’t expecting. This rose to 30% among people who took their whole pension pot in one go.
Aegon’s pensions director Steven Cameron said: “If someone takes a lump sum from their pension, part can be tax free, but the balance is subject to income tax. A large lump sum could take someone into a higher tax band - immediately leading to a cut in the amount they actually receive. Taking income gradually can avoid this happening.”
The research also found that 6% of people using the freedoms faced unexpected issues with their benefits, such as a reduction in welfare payments. This is a particular problem for people with lower pension savings. 11% of people with pension pots worth less than £20,000 said they have faced unexpected issues with their benefits.
Cameron said: “The findings in the Citizens Advice report around pension freedoms raises an important issue around the impact taking cash from your pension could have on benefit entitlements. Savings an individual has in a pension policy are not taken into account when someone is assessed for entitlement to means tested benefits, but if money is taken out and saved elsewhere, this can affect entitlements. It’s important that this is made much clearer to those considering the pension freedoms.”
Cameron is right that better advice and guidance can help people to make the right decisions about their savings.
Pennie agreed, arguing that is about time the government and regulators sat up and took notice. He said: “In a pension world where we insist someone with £30,000 of defined benefit pension benefits must take advice before being allowed to transfer, why do we allow people with defined contribution pensions, irrespective of size, to simply do what they want?
Surely it’s time for the government and regulator to take more effective measures”
“People are vulnerable to the growing number of pension scams and in danger of unwittingly scamming themselves – surely it’s time for the government and regulator to take more effective measures to help and ensure people make better retirement decisions.”
However, advice will not change the fact that people are generally distrustful of pensions.
The freedoms should have been an opportunity for the sector. In theory, well-advised drawdown should give members the benefits of freedoms whilst allowing unused money to grow and avoiding unexpected tax bills. Instead, consumers are flocking to consumer savings products, despite the tax and income consequences.
One retiree said: “I’ve put my money in a savings account which I realise an adviser might not say is the best thing to do. I get about 1% on the current account but I’m not paying a management charge for that. My focus was to keep it safe.”
Clearly advice alone does not go far enough. If we want people to make the right decisions, we need to change the perspective that pensions are unsafe.
This is a big ask, but not impossible. And a major industry wide education campaign is needed. Otherwise, we can provide people with as much advice as we like but they’ll still shun pensions whether it’s the right decision or not.