Posted In: Wealth Management Administration
One year on from the launch of pension freedoms and HM Revenue & Customs (HMRC) figures tell us that £4.3 billion has been withdrawn from almost a quarter of a million pension pots under the new rules.
Yet some providers are only now getting to the point where they have effective systems in place to deal with demand for flexibility in line with the new rules. For some pension providers, the pace of change in recent years has meant shortcuts have had to be taken to keep up with reforms and the introduction of more flexibility has led many organisations to apply quick fixes to already creaking technology. Trying to implement the new rules to legacy pension products on legacy systems is proving difficult, if not impossible.
In this environment there is little emphasis on innovation. When a large number of processes are work-arounds or via manual spreadsheets, further change that hasn’t been imposed by the Government or the Regulator can be pretty unappealing.
In the wake of the reforms, there has been a dearth of appropriate pension income options available in the UK at the time when there is greatest demand. Investors’ needs are evolving; with everyone living longer, retirement planning is now about combining different assets to make a long-term income stream that will see you through from when you stop working to when you die. As that period of retirement could run into decades, innovative new products are exactly what the market requires.
In the absence of clearly communicated flexible alternatives, the HMRC figures suggest that people accessing their pension pots – especially those with pension pots below £30,000 – have effectively been forced to take benefits in a sub-optimal way.
Yet technology does exist that allows providers to take advantage of the opportunity offered by the pension reforms to rethink how income can be delivered. And thankfully, some firms are developing these next generation post-freedoms products, combining drawdown with a guaranteed income that offers some protection against living longer than you expect.
There is a further glimmer of hope, in that HMRC figures show the pace of withdrawals slowing. In the first six months since the launch of pension freedoms, £2.8bn was withdrawn, compared with £1.6bn in the second six months. We wait to see what impact the UK’s decision to leave the European Union now has on pension freedom withdrawals. The stockmarket volatility we have seen since the referendum is expected to continue, at least in the short-term, and intermediaries are generally advising clients not to make panic sales. How that will play out in terms of people exercising pensions freedoms remains to be seen.
Whatever happens over the medium to long-term within stockmarkets,as more providers invest in smart technology to offer enhanced pension income choices, investors will at least have more options than simply fully cashing out their funds and hopefully more will seek ways to use their pots to draw an income in older age.