Pension freedoms one year on: Boomers shun sports cars for DIY

Benjamin Harris was a maverick in the early days of journalism. He was not alone but he definitely stood out from the crowd.For a nation used to handing over its pension savings to an insurer for an annuity at age 65, George Osbornes 2015 pension reforms were a revolution.The chancellors radical changes meant future retirees would no longer be herded into annuities, products that delivered secure retirement income but were perceived as poor value and inflexible.MoreOn this storyOn this topicIN PensionsInstead over-55s would be free to spend their pension pots as they wished including blowing the lot on a luxury sports car or in a Las Vegas casino.The 2015 reforms, dubbed the pension freedoms, were a stunning political move that could either transform the retirement prospects of millions or condemn future generations to poverty in later life.A year on from the landmark reforms, FT Money has surveyed pension experts, providers and consumer campaigners to assess how the biggest changes in nearly a century have panned out.We found the freedoms have struck a deep chord with the public, which has cashed in nearly 6bn; they have also reinvigorated interest in pension saving. But the reforms have also given rise to more worrying trends, from pension scams to savers being ripped off by high charges or running out of money in old age.Trend 1: Drawdown enters the mainstreamOne of the key developments of the pension freedoms has been the rapid expansion of the income drawdown market, which has moved from being a niche product to part of the mainstream. Before the reforms came into full force on April 6 2015, about 90 per cent of retirees would buy an annuity with their defined contribution pension pots while about 10 per cent opted for drawdown, where funds are left invested and typically exposed to the stock market.This was because drawdown was not considered suitable for investors with funds of less than about 100,000 and who could seldom afford the help of a professional adviser.But the freedoms have dramatically reshaped the market. Barriers to entry, such as minimum fund sizes, were cut drastically or even scrapped, opening up the market to all as savers turned their backs on annuities.Scottish Widows, like most other large providers, expanded its product range to include a simplified, direct-to-consumer flexi-access drawdown product. This has been popular, with about 10,000 customers using this option post freedoms, says Scottish Widows.Flexi access drawdown was the biggest growth area for Aegon, which says assets moving into this option jumped 88 per cent in the year to the end of 2015. Trend 2: The rise of the DIY investorAs drawdown has moved into the mainstream, providers have developed online tools to help novice investors self-manage their drawdown accounts, including life expectancy calculators.Standard Life, which saw 500m flow into its non-advised drawdown product in 2015, said its online retirement tools had been used by more than 225,000 customers.Aviva also launched an online direct service, which included a budget planner, and tax and life expectancy calculators. The tool been visited more than 30,000 times since its launch in the second half of 2015.But the fast growth of DIY drawdown is worrying some, who say novice investors are putting their funds at risk even with whizzy tools at hand to help them understand how long they need to make their money last.Recent data from the FCA suggested that 42 per cent of those going into income drawdown since the pension freedoms did not use a professional adviser.This isnt a decision that somebody should be making if they arent getting advice or dont know exactly what theyre doing and the risks theyre taking, says Patrick Connolly, certified financial planner with Chase de Vere, an IFA firm.Execution-only firms are providing online drawdown calculators for people to make an assessment of whether their pension money is likely to run out, he adds.These can be incredibly misleading as the calculators assume that the underlying pension investments grow each year. This, of course, is unrealistic, as many of those who started using the new freedoms when they were launched last April will be all too aware.Trend 3: Pension scamsRetirees were a soft target for scammers before the 2015 reforms and evidence suggests the pension freedoms have vastly increased opportunities for fraud.Research by Citizens Advice, the debt charity, suggests that as many as 10.9m consumers may have received unsolicited contact such as a cold call or text about a pension since April 2015. More than three-quarters of consumers or 78 per cent who had received an unsolicited contact were offered free pension advice or reviews.Fraudsters have shifted their tactics to rob people of a financially secure retirement, says Gillian Guy, chief executive of Citizens Advice.Its difficult for people to keep up with changing pension scams and our research shows that almost nine in 10 would miss common warning signs such as unusually high investment returns.Trend 4: Poor shopping around ratesThe Financial Conduct Authoritys most recent data on the pension freedoms showed 58 per cent who opted for drawdown, and 64 per cent of those who had purchased annuities, had stuck with their existing provider. This suggested most customers had not shopped around and were therefore unlikely to have chosen the best deals.Weve calculated that based on the first six months of pension freedoms, that the number of people who have not shopped around for their annuity will collectively miss out on 104m of retirement income over the course of their retirement, says Andrew Tully of provider Retirement Advantage.Despite the measures being introduced in April to try and encourage better practice, the situation is getting worse and the market is failing consumers.Those shopping around are confronted with an opaque market with unfathomably complex charging structures putting them at risk of being ripped off, critics are warning.Trying to work out what a drawdown portfolio costs is worse than trying to calculate a mobile phone tariff with a pneumatic drill going in the background, says Holly Mackay, founder of BoringMoney.co.uk, a consumer website.Most providers have a long list of extra charges, which reminds me of Ryanair. Investors need to be careful about jumping for what looks like the lowest fare because extra charges can be hidden in the small print.Trend 5: The non Lamborghini riskIf some were concerned that people would blow their pots recklessly on luxury sports cars, others have identified a countervailing phenomenon: savers being too conservative with their money.Since the reforms came in, money has been moved out of the tax-efficient pension wrapper with the saver likely to have taken a tax hit on the way out and placed in low interest-bearing cash accounts.Hargreaves Lansdown, a leading asset manager, says about a third of its customers who had responded to a recent survey were holding freed-up pension money in cash accounts. The real risk is people take their money, put it in a savings account and then become afraid of spending it, says James Lloyd, director of the Strategic Society Centre, a think-tank. We are now seeing this happen.Trend 6: Free guidance flopWhen the pension freedoms came into force, the advice market was not geared up to help the mass of savers with funds of 30,000 or less.To help over-55s navigate their options in the newly liberalised market, the government set up Pension Wise, an independent and free-to-use guidance service.Those eligible for the service were offered a free 45-minute session, which covered tips on how not to get tripped up on tax when cashing in their pension, or by fraudsters and how to shop around.But a year on and take up on this key consumer initiative has been disappointing low.While nearly 1m pension payments, either as lump sums or income drawdown, have been made since April last year, only 50,000 Pension Wise appointments had been booked though 2m had visited the online guidance website.Royal London was typical of providers in that just a third of its customers said they had used Pension Wise.The main reasons cited for not seeking guidance or advices that they consider that their pot was too small or they already knew what they wanted to do, says Royal London.Trend 7: Goodbye annuities and hello hybridsAs annuities fell out of fashion, new products combining the secure income of an annuity with the flexibility of drawdown hit the market. These expanded the choice available to retirees but consumer campaigners urged caution on products which offered income or capital growth guarantees.The pension freedoms have unlocked the opportunity for products which are more complex and have higher charges, says Mick McAteer, director of the Financial Inclusion Centre, an independent think-tank.For some it would have been better, and more cost-efficient, to stick with an annuity. Some of these products just arent stacking up. The regulators do need to be aware of products promising unrealistic projection rates.Trend 8: Cashing in at 55 the new normalBefore the pension freedoms, people would typically avoid touching their pension pots until the age of 65. Savers are now dipping in much earlier.We have noticed a definite peak around those who were between five and 10 years from retirement who are taking cash they make up 50 per cent of those who do, says Fidelity International.This raises several flags. Being so far from retirement, have they thought of the longer-term impact on their pots value? Or are they depleting their pot with several others safely tucked away? We just dont know.Trend 9: Happy days at the TreasuryThe freedoms have proved a boon for Mr Osborne. The Treasury has raked in 900m in taxes from people cashing in their pensions 200m more than anticipated.During the year much work was done by the government to ease the barriers to taking pension cash, including putting pressure on those providers not offering the full suite of flexible products and relaxing advice safeguards.Simon Laight, a pensions expert with law firm Pinsent Masons, says the Treasury has done all right out of the reforms. Some might argue that in the name of championing consumer rights, the Treasury is filling its coffers.Trend 10: Pensions are exciting again!Many people value the additional flexibility offered by the new freedoms, advisers say. Funds that may have been on a low-value annuity are better deployed to pay down debt, or freed to help a child with their wedding.They say the freedoms and changes to death benefits that made pensions more attractive as a means of passing down wealth have transformed attitudes towards the retirement saving vehicle.What has changed is that most clients now see pensions as a rather exciting place to save, says Jonothan McColgan, director and chartered financial planner with Combined Financial Strategies, a firm of independent financial advisers.For the first time in years, pensions are getting positive publicity and its fantastic to see clients starting to re-engage with pensions and see that the money is still theirs and can be used for their benefit.Copyright The Financial Times Limited 2016. 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