Jeff Salway: Potholes on the road to pension freedom

SOME fears about the latest rules have come true, says Jeff Salway

Living the good life:  Spending your retirement cash on a flashy car was one way to lose out, but there were many others. Picture: Contributed
Living the good life: Spending your retirement cash on a flashy car was one way to lose out, but there were many others. Picture: Contributed

Fears of lifetime savings being splurged on sports cars may so far have proven unfounded, but many others have been realised during the first 12 months of the so-called pension “freedoms”.

It was on 6 April 2015 that new rules took effect allowing people in defined contribution schemes to unlock their entire pension pot from the age of 55 without incurring punitive tax charges.

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The shake-up sparked predictions of people taking their entire pension savings and blowing the whole lot at once. Such instances have been rare. But the wide-ranging nature of the changes, and the haste with which they were implemented, have raised plenty of other concerns, from pension fraud and low awareness of guidance services to excessive fees and nasty tax surprises.

“This was a rushed policy and rushed legislation, and the implications of this are still being felt,” said Rachel Vahey, Edinburgh-based independent pensions consultant. “Although the mechanics of pension freedom are working well, there are still gaping holes in the fabric of how to help people make the right decisions and to give them the guidance to make those decisions work for them.”

Here we look at some of the issues to have emerged over the past year.


More than a third of over 55s have been targeted by potential pension scams over the past three months, according to Retirement Advantage, including texts, calls and emails offering free pension reviews or investment opportunities.

But recent research by Citizens Advice found that almost nine in 10 people are unable to spot the common warning signs of a pension scam (such as a cold call or unusually high investment returns).


The Treasury has raked in £900 million from the first year of the pension freedoms, the Office of Budget Responsibility estimates – £200m more than in expected. The figure has been swelled by low awareness of the tax implications of withdrawing cash from pensions. Just one in four pension savers is aware that while they can take 25 per cent of their pension tax-free, the rest is charged tax at their marginal rate, according to a survey last year by employee benefits consultants Portcus.


The timing of the overhaul has highlighted the danger of entering drawdown (where the pension remains invested at retirement and income taken from it in tranches) without taking advice.

The market volatility of early 2016 highlighted the threat posed to drawdown investors by “pound cost ravaging”, which refers to the impact on the value of a pension fund when the same level of income is taken even as the market falls. Many retired investors are now stuck in “drawdown captivity” as they wait for their funds to recover.

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Vahey said: “Too many people are rushing into unadvised drawdown without the proper support, without shopping around for the best deal for them, or the knowledge of the right coping tactics once they are there. The risks they face is they run out of money in retirement.”


The government launched the Pension Wise guidance service as part of the reforms, but take up of the service, delivered by The Pensions Advisory Service (TPAS) and Citizens Advice, has been low. It is now being restructured, with Pension Wise and TPAS being merged to create a new body.

Graeme Forbes, chartered financial planner at Intelligent Capital in Glasgow, said “Whilst it is well-intentioned, Pension Wise’s mandate is simply to outline all of the options to the member, but it can’t actually implement anything.”

Just one in five people over 55 is willing to pay for professional financial advice when taking money out of their pension, research by found.

The number of people making pension decisions without taking advice has contributed to the alarmingly high proportion of guaranteed annuity rates being sacrificed. Almost two thirds of people holding policies with the guarantees – which typically promise an income of 10 per cent a year – are failing to take them up, new FCA figures show.


The speed with which the changes were implemented put huge pressure on providers. Some issues have been ironed out and controversy over high exit fees has led to a cap that will be imposed from next year.

“There is pressure on providers to reduce or even abolish penalties all together,” said Forbes. “But many are holding out, so if you face a penalty, complain to the Insurer and you may find that the penalty will be reduced.”

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But other problems with providers remain unresolved, he added. “Don’t expect your provider to be able to easily facilitate the ‘freedoms’, if at all. Many pension policies are old and administered manually, with the insurer having no appetite to spend time or money on new systems to allow members the freedom that the law now allows.”