Pension freedoms review – what the Work & Pensions Committee proposals could mean for savers

The influential Work and Pensions Committee has carried out a review of the pension freedoms introduced in 2015 and is calling on the Government to introduce automatic enrolment to Pension Wise guidance, ‘decouple’ tax-free cash from pension pots and tackle increasing complexity.

  • The Committee has concluded the pension freedoms introduced in 2015 have been a “success” and should not be reversed
  • However, the Committee has proposed a series of reforms designed to better support savers accessing their retirement pot
  • Policymakers should aim for 60% of people accessing their pension for the first time to receive either guidance or regulated advice, the Committee argues
  • MPs want the Government to trial automatic enrolment into Pension Wise guidance at the point of access and age 50
  • Decoupling taking tax-free cash from making a retirement income decision, revisiting the idea of a ‘statement season’, the advice/guidance boundary and addressing complexity among other key areas of focus

Tom Selby, head of retirement policy at AJ Bell, comments:

“Making sure people taking an income from their pension have access to the support they need is absolutely key to ensuring good retirement outcomes.

“We agree with the Committee’s conclusion the freedoms introduced in 2015 have been a success, which is in no small part because the pensions industry has been able to adapt to the changes.

“While we don’t agree with all the recommendations put forward by the Committee, MPs deserve credit for taking a pragmatic approach.

“Rather than simply demanding radical reforms immediately, the Committee wants to road-test through trials ideas such as automatic enrolment into guidance and tax-free cash ‘decoupling’.

“This is a sensible approach to policymaking which should ensure any interventions are based on a firm body of evidence, with unintended consequences and costs thoroughly considered.

“We hope the Government and regulators consider adopting a similar approach when introducing reforms in the future.”

The Work and Pensions Committee has made recommendations in four areas…

  1. Options when accessing pensions

Key recommendations include:

  • Regulators should carry out a ‘scoping exercise’ on pension tax-free cash ‘decoupling’
  • The FCA should look to increase the number of people choosing a mixture of retirement products
  • The Government should continue to support the development of collective defined contribution (CDC) schemes

Comment: “At the moment, anyone who wants to access their 25% pensions tax-free cash needs to make a decision about the retirement income route they wish to take with the remaining 75%. For most people this means entering drawdown or buying an annuity.

“The Committee wants to explore the possible benefits of ‘decoupling’ this decision, meaning someone could take their 25% tax-free cash without choosing a retirement income route for the rest of their fund.

“It is not clear why such ‘decoupling’ would help savers make better retirement decisions. For those people who are focused on taking their tax-free cash, entering drawdown often makes little difference from a practical perspective.

“For people not choosing to draw an income when taking their tax-free cash, their money may very well be invested in exactly the same way as before, with identical charges. This risks introducing another retirement option and increasing complexity for customers for no obvious benefit.

“The idea that the number of people taking a mix of retirement ‘products’ should be increased feels flawed. Although we agree with the Committee that taking benefits in this way can be appropriate, this will depend on someone’s personal circumstances and preferences.

“Policy focus should instead be placed squarely on improving understanding and engagement, which in turn may lead to more people combining, for example, drawdown with annuitisation in retirement.”

  1. Supporting decision-making before accessing pension savings

Key recommendations include:

  • More clarity should be provided by the FCA on the advice/guidance boundary
  • The £500 pension advice allowance should be revisited
  • Government must be prepared to drop plans for a ‘pension statement season’ if the benefits cannot be demonstrated
  • A review of the ‘midlife MOT’ should be carried out to ensure it is working effectively

Comment: “One of the biggest challenges to supporting savers is the lack of clarity on where guidance ends and advice begins.

“Providers supporting non-advised customers already offer huge amounts of guidance on various retirement topics, but more could potentially be done to help savers make good decisions if there was clarity on the advice/guidance boundary.

“We agree with the Committee’s view that the Pension Advice Allowance has failed to deliver what policymakers hoped for, in part because savers can already pay for advice from their retirement pot. As such we believe it is a lack of demand that is likely to be the issue.

“The idea of a pensions statement season risks simply adding extra paperwork without any obvious consumer benefit. We therefore strongly support the Committee’s view that the idea should be reviewed and potentially dropped if its benefits cannot be demonstrated.”

  1. Pensions Dashboards

Key recommendations include:

  • Pensions Dashboards must be properly resourced to get implementation right and ensure data is accurate
  • No consideration should be given to allowing transactions through Dashboards until they are well established
  • The Money and Pensions Service (MAPS) should develop a guidance service to support savers by using the data available through Pensions Dashboards

Comment: “Pensions Dashboards have the potential both to help savers locate lost pension pots and, over time, make better-informed decisions about their retirement.

“Making sure the data on Dashboards is accurate and people’s details protected will be absolutely critical in fostering trust among users.

“We therefore welcome the Committee’s recommendations in this area, which should ensure the project remains laser-focused on its core purpose.

“It is possible that official guidance services currently available to savers could be enriched by using data available on Dashboards.

“However, using people’s information in this way could potentially push guidance providers closer to inadvertently providing regulated advice. It would therefore likely need to be accompanied by a proper review of the advice/guidance boundary to provide clarity.”

  1. Wider Government policy

Key recommendations include:

  • The Government should do everything possible to ensure that future changes to the pensions system do not bake in additional complexity
  • The DWP and Treasury should work together to monitor progress of the pension freedoms

Comment: “Complexity is a significant barrier to engagement and Government is too often responsible for bamboozling savers with mind-bending new rules.

“The recent shambolic handling of the Normal Minimum Pension Age (NMPA) increase from 55 to 57 in 2028 and various changes to the pension tax rules over the years are obvious examples of Treasury policy that has made life more confusing for savers.

“We now have a pension system with three different versions of the annual allowance, seven lifetime allowances ‘protections’ and now potentially members who will have two different NMPAs within the same pension scheme. Nobody in their right mind would design a pension system like this from scratch.

“While we agree with the Committee that future changes should avoid complexity, Government should go further by reviewing the existing rules with the dual aims of simplifying the framework and encouraging more people to save for retirement.”


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