Pension freedoms six months on: caution prevails

Breaking open the piggy bank

According to Fidelity Personal Investing, enquiries to its retirement advice service over the past six months have focused mainly on three themes: the possibility of transferring final salary pensions to a defined contribution (DC) scheme to take advantage of the freedoms; the rules regarding the £1 million pension pot Lifetime Allowance; and the potential for taking tax-free cash.

Despite a rise in enquiries, however, there has been relatively little action taken to date, says Maike Currie, associate director of Fidelity Personal Investing. Fewer than 6 per cent of DC members have accessed their pots, and the main focus has been the 25 per cent tax-free lump sum. Of those taking the full amount, half are accessing pots worth less than £10,000.


In a quarter of cases, the tax-free cash is being used as a means of helping younger family members onto the property ladder, though 'silver separators' are also making use of it to facilitate their divorces. Otherwise, it appears to be primarily used for one-off 'big treats' such as holiday homes.

What people do not appear to be doing is getting to grips with the big questions surrounding how they draw an ongoing income from their pensions.

Fidelity finds that where drawdown has been set up, people are taking between 4 and 7 per cent; 4 to 5 per cent is deemed sustainable.

Equity income and lower-risk multi-asset funds are the most popular fund choices, but DIY investors in drawdown tend to hold more in cash - 17 per cent of their pot, compared with only 7 per cent for advised clients. Again, while this may have made sense over recent months of market volatility, Fidelity suggests it is not sustainable as a long-term strategy.

There are several aspects of drawdown where investors need greater support and education, argues Richard Parkin, head of retirement at Fidelity.

'It's not just about stopping people running out of money - in many cases they have an over-frugal approach,' Parkin says. 


He points to the experience in the US, where Fidelity (which has an extensive US high street operation) has found that people want to retain a big buffer of pension assets - averaging 48 per cent of their pension pot - until death, because they are so worried about running out. And that is the case even where they don't plan to pass on their pension pot as an inheritance.

People need to learn to make the best use of their money so that they can enjoy their later years without leaving a large unutilised pension pot when they die, he adds. But they are also likely to require more spending power in earlier retirement, when they are still relatively fit and active.

Parkin makes the case for using a slice of pension to buy a deferred annuity that kicks in and pays a guaranteed income for life if you live beyond, say, 85. If you don't live that long, the capital remains as part of your pension estate.

However, insurance companies have been slow to respond to pension freedoms, and so far there has been little innovation in regard to income drawdown products.

'Customers want security, but they don't want to buy an annuity because they've been told they're no good. Annuity sales have dropped 85 to 90 per cent in the past six months; but I think annuities will make a comeback,' Parkin says.


He also argues for a 'more dynamic' approach to income management. So, for example, people could draw down slightly more from their pension pot, on the understanding that if markets do badly they will reduce their withdrawals to protect capital.

Given the complexities of these and the other investment decisions involved, he adds, people really need guidance to help them optimise their use of their pension pots.

Robo advice could play a big role in making the decision-making process more affordable, but in most cases for today's retirees there will be complications such as a final salary pension involved, so people will need a conversation with a real expert as well, Parkin says.

The requirement for ongoing support is highlighted by research into financial advisers' views from Investec Wealth & Investment. This finds that almost nine out of 10 advisers believe their clients require ongoing help to ensure they generate capital growth as well as income.

Almost eight out of 10 need help to diversify their sources of retirement income, and three quarters want assistance in organising their wealth so that they are able to pass on their pension pots.

Investec says that only 18 per cent of clients are interested in the prospect of selling their annuities on a secondary market.

More about