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Pension flexibilities: the 'freedom and choice' reforms

Published Friday, September 28, 2018

Looks at the rules which came into force in April 2015 giving people more flexibility about when and how to access their defined contribution pension savings

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Individuals with defined contribution (DC) pensions build up a pension fund using contributions, investment returns and tax relief. Before 6 April 2015, most people used their DC pension funds to purchase an annuity. This was strongly encouraged by the pension tax legislation in force at the time, which authorised lump sum or flexible payments in limited circumstances.

In Budget 2014 the Coalition Government announced that from 6 April 2015 people aged 55 and over would be able to make withdrawals from their DC pension pot “how they want, subject to their marginal rate of income tax in that year.” Legislation for this was in the Taxation of Pensions Act 2014. To help people navigate the wider range of options, a guidance service – Pension Wise – was established - see Library Briefing Paper SN 7042.

Following press reports of perceived difficulties, the Government launched a consultation in July 2015 on whether individuals were able to access the new pension flexibilities easily and at a reasonable cost. An update from the FCA said that the overall majority of consumers had been able to do so, with some exceptions (PN15-28). In February 2016, the Government announced proposals for making the transfer process smoother and more efficient. It placed a duty on the FCA to impose a cap on early exit charges (Bank of England and Financial Services Act 2016, s35) and enabled this to be implemented in occupational schemes in Part 2 of Pension Schemes Act 2017.


In the 2016 Autumn Statement, the Government announced a reduction from £10,000 to £4,000 from April 2017 in the Money Purchase Annual Allowance - which limits the amount individuals can continue to saving in a DC pension once they have accessed their savings flexibly. This was legislated for in the Finance (No. 2) Act 2017 (s7).

The Work and Pensions Committee published a report on pensions freedoms on 5 April 2018. It found that there was “little evidence that savers were frivolously squandering their life savings” but that this did not mean that people were making well-informed pension freedom decisions. It proposed a two-pronged approach:

  • Protecting savers by requiring providers to offer a “default decumulation pathway suitable for their core customer group” and allowing NEST to offer decumulation products, including a default drawdown pathway, from April 2019.
  • Empowering savers to choose by requiring providers to offer single page pension passports and provide necessary information to the pensions dashboard, which should be hosted by the new single financial guidance body, funded an industry levy and in place by April 2019. (HC 917, April 2018, summary).

In its response, the Government said:

  • It was not, at this stage, convinced of the merits of default decumulation pathways or that NEST should be able to offer decumulation services but would consider the recommendations of the FCA’s final Retirement Outcomes Review in summer 2018;
  • It would consider the issue of pensions passports in light of the Retirement Outcomes Review and set out the conclusions of its feasibility report into the pensions dashboard in due course. (Pension freedoms: Government response, HC 1231, June 2018)

The FCA published the final findings of its Retirement Outcomes Review on 28 June. It found that

  • there are weak competitive pressures and low levels of switching. Most consumers choose the 'path of least resistance', accepting drawdown from their current pension provider without shopping around
  • one in three consumers who have gone into drawdown recently are unaware of where their money was invested
  • some providers were ‘defaulting’ consumers into cash or cash-like assets, but holding cash is highly unlikely to be suited for someone planning to draw down their pot over a longer period.
  • consumers might pay too much in charges. We found that charges for non-advised consumers vary considerably from 0.4% to 1.6% between providers, and are, on average, higher than in accumulation (where in some cases they are capped at 0.75%)
  • drawdown charges can be complex, opaque and hard to compare
  • so far, we have not seen significant product innovation for mass-market consumers.

It launched a consultation on a package of remedies to:

  • Protect consumers from poor outcomes;
  • Improve consumer engagement with retirement income decisions; and
  • Promote competition by making the cost of drawdown clear and comparisons easier. (CP18/17, June 2018).

It also recommended that the Government consider the merits of ‘decoupling’ tax-free cash from other pension decisions. This was because many consumers focused on taking the tax-free cash at that point and did not engage with the decision of what to do with the rest of their pot (Retirement Outcomes Review, para 1.38).

The Government said it looked forward to working with the FCA and industry to consider the review’s recommendations (HL 9139, 16 July 2018).

This note looks at the development of policy. FAQs from constituents are addressed in Library Briefing Paper CBP-7997 Workplace pensions 2017: FAQs for MPs (April 2018). The decision not to allow annuity holders to sell their income stream to a third party is discussed in CBP-07077 Secondary annuities market (August 2018).

Commons Briefing papers SN06891

Author: Djuna Thurley

Topic: Pensions

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