Issues

Freedom Day has come and gone but early reports suggests we are not seeing a rush to cash out just yet although the potential for bad choices and poor outcomes is high

10 April 2015

Freedom Day came and went without the pensions market collapsing. The fact that April 6th was a bank holiday and the weather was set fine may have helped, but post-Freedom Day reaction from the likes of Standard Life, Fidelity and Hargreaves Landsdown suggests the rush to cash out was….well more of a trickle.

That said volumes of calls being taken by the big providers were at least double the norm with anywhere between 150 and 500 calls being taken per provider each day on the first few days of Pensions Freedom. Some 1,400 people booked telephone guidance appointments with The Pensions Advisory Service (TPAS) and just over 400 face-to-face sessions were booked in with the Citizens Advice Bureau (CAB) last week also.

Hargreaves Landsdown gave us the positive scientific breakdown of their customers’ intentions during call to the D2C platform market leader and less than 8% of them were on course to exercise the option of pulling all their retirement savings out. A whopping 42% were planning on going into drawdown while nearly 17% were planning ad hoc lump sum withdrawals such as UFPLS. Perhaps more worryingly Fidelity’s head of retirement Richard Parkin indicated that it was the small pots that were taking all the cash, not caring about the tax implications even when they were being explained, while larger accounts were just taking the tax-free amount. So are the retirees that most need to show constraint in exercising their choices actually the ones set to blow it all in an instant?

Standard Life’s feedback suggested quite a few of their customers may be looking to exit big. In their communications to the media, the life assurer focused more on what people were planning to spend their money on in cases of full or partial withdrawal. Again reasons were wide-ranging from paying off debts, financing weddings or even buying a speedboat. No declared Lamborghini buyers yet mind…

However perhaps while the headline concerns have been linked to those cashing out completely and buying their dream supercar, what should really be catching our eye is the steep rise in the number of people set to move into drawdown. Especially as, according to one study commissioned by Old Mutual, there is clear evidence that most of those entering drawdown without the constraints that existed pre-April 6th are going to be taking too much out, too quickly, leaving them on average out of retirement funds just 10 years after they started drawing down.

Worse still, now that many are going to be starting the pensions drawdown process in their mid-50s (given the fact that most have no other pension pots to fall back on), many more of us are going to reach our 65th birthdays with the prospect of being 100% dependent on the state pension alone for retirement income. This is worrying stuff especially if we are to believe the Hargreaves Landsdown exit poll numbers that suggest nearly 60% of those planning to raid their pensions for the first time post Freedom Day are going into drawdown or ad hoc lump sum withdrawals.

Old Mutual Wealth customer director Carlton Hood sums this problem up thus: "Working out how long your pension savings will last is not a simple matter. Many people apply a rule of thumb and plump for 10%, thinking that's a reasonable amount and that their investments will grow to fill their pot back up. Basically they're banking on taking 10% a year forever. The reality is that if they aimed to take around 5% each year instead, their savings are much more likely to last for the 20 plus years people generally spend in retirement these days."

As was predicted a massive amount of advice, guidance and financial education is needed and fast. The Citizens Advice Bureau report on pensions freedom scams, out just four days after Freedom Day, only serves to illustrate the dangers of being led astray. Meanwhile those that have been able to find Pensions Wise - the Government-funded educational website providing guidance around new retirement options - seem to rate its content. But the Government has been tripped up by General Election purdah rules which ban them from spending money publicising controversial policies in the run up to a general election. In fact purdah rules must remain in place now until a new government is official formed on the day of the Queen’s Speech set for 27th May. So in the vital eight weeks following Freedom Day, many who would benefit from Pensions Wise’s sage guidance will probably not even know it exists.

However all is not lost. Retirement solutions providers have been working overtime to develop online pre and at-retirement planning tools. We have one that is designed to enable customers to explore their retirement options and work out whether they are on track pre-retirement and another to explore your best options for decumulation once in-retirement. We’ve been rolling out the highly intuitive Imago Self Direct for two major providers in the last couple of months and early signs are it’s going down well with platforms and IFAs as well as their customers.

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