It’s now three years since the pension freedoms were introduced, and in that time we have seen millions of people withdraw billions of pounds from pensions. That outcome isn’t a great surprise as the intention behind the freedoms was to let people do that very thing. So it is interesting to read that a number of providers are now considering asking customers to complete disclaimers if they withdraw more than a certain level of money from their pension. Is this a necessary safeguard – especially for non-advised customers – or does it run counter to the principle of pension freedom?
On one hand, one could argue that any additional safeguards are useful. Over one million pots have been accessed since April 2015, nearly three-quarters by those under age 65, and nearly £16 billion has been withdrawn up to the end of 2017. Many of these people will have income from employment and so will be paying at least 20% income tax on withdrawals in excess of the tax-free lump sum. More than half save or invest their withdrawals suggesting they have no immediate need for the cash1. So it seems clear that withdrawals could be taken in a more tax-efficient basis. However, I have doubts that asking people to sign a disclaimer if they take a significant withdrawal will change that behaviour. Especially if the disclaimer is presented late in the process, when people are likely to be committed to their course of action and much less receptive to potential change.
While it’s unclear what level of withdrawal will trigger a requirement to complete a disclaimer, what does seem apparent is it’s a very blunt tool. No two individuals are alike and what seems an excessive withdrawal for one person may be perfectly reasonable for another, given their individual circumstances. For example, someone who has a significant final salary pension starting in a few years’ time, alongside their state pension, may want to withdraw their defined contribution pot over a short period as a ‘bridging pension’. Another may want to take some lump sums out at younger ages to pay off high interest debt. A third may want to make a withdrawal and put it in their bank account as they believe it is safer. These examples (and the hundreds of other potential scenarios) aren’t the same, so shouldn’t trigger the same warning.
Research suggests many people are using their freedoms sensibly and we know they are hugely popular. But some people do pay more tax than they need to, and the scourge of scams is ever more evident. So I fully agree with steps to help people make informed decisions. Taking professional advice is clearly the best way to do this. However, 30% of drawdown sales are now non-advised, which is a massive increase from 5% (of a much smaller drawdown market) before the freedoms1. Add in the many who are withdrawing funds directly from pensions on a do-it-yourself basis, and it’s clear we need measures to help those who don’t take advice.
Disclaimer not the answer
A disclaimer applying only where significant withdrawals are taken doesn’t, in my mind, do anything worthwhile to help educate consumers. Nor does any suggestion of a ‘safe’ withdrawal rate. We may be able to give some ‘rules of thumb’, but a suitable income for one customer may not be suitable for another (and, whatever situation they are in, that needs reviewed on an ongoing basis, not set at outset and forgotten about). Others may benefit from guaranteeing a certain level of income to cover essential expenditure, giving greater freedom with remaining funds.
We need to help people before they reach the point of making withdrawals, as that will often be too late as decisions will have been made. Help them understand the value of advice. Beef up the guidance system, and nudge more people towards it earlier in the process, so that the excellent help given by the likes of TPAS is used more widely. Continue to educate people about the tax implications of withdrawals, and the danger posed by scams. These measures won’t give a perfect system, and won’t mean people always get the best outcome. But as an industry we need to strive to do more to help customers manage their retirement, rather than ask them to complete disclaimers.