The Work and Pensions Committee (WPC) has called on both the UK government and regulators to do more to support consumers make better decisions with their money.
While pension freedoms have largely been deemed as “success”, the policy is at “risk of being seen as a failure” unless people start receiving proper guidance, the committee said in its report.
As a result, the WPC is now urging the government to set a target of at least 60% of people using Pension Wise appointments or receiving paid financial advice to boost the uptake of pension guidance and advice.
Currently, just 14% of defined contribution pension schemes are accessed after the using the free governmental advice service.
The WPC also suggested trialling automatic appointments with Pension Wise, as many people need more support than what they currently receive.
These should be split into two: one at age 50 before a person has the possibility to access their pots, and one when they tap into their pension.
Savers are also struggling to navigate the pension system, the Financial Conduct Authority (FCA) told the committee during its inquiry. They described pensions as a “minefield” with many struggling to understand how they work.
The WPC also put forward an argument for scrapping the Pensions Advice Allowance – where people can withdraw £500 ($680, €600) from a pension up to three times in different tax years for advice.
Guidance a ‘missing piece’
Stephen Timms, chair of the WPC, said: “From the introduction of auto-enrolment through to the continued shift from defined benefit to defined contribution schemes, the pensions landscape is in a constant state of change. It’s little wonder therefore that — as the government’s own financial regulator recognises — people struggle to navigate the pensions minefield.
“When the 2015 reforms were introduced, the government guaranteed that savers would be given the tools they needed to take advantage of the new range of options and make well-informed decisions. Seven years on, guidance remains the missing piece of the pension freedoms jigsaw.
“Nudging savers will not be enough. The government and regulators can no longer just sit on their hands as decision making becomes ever more complicated. They must end their timidity and be much more active in supporting people as they approach retirement. We know that those who use Pension Wise find it useful and often make different choices as a result. Every effort should be made to boost its use.
“Without intervention to drive up dramatically the numbers receiving advice and guidance, savers will make poor decisions – and, in far too many cases, become scam victims – and the pension freedoms, far from living up to their name, will instead trap people in an increasingly confusing web of complexity.”
One of the WPC’s recommendations is to look into the separation between withdrawing the tax-free 25% lump sum and the remaining 75%, and make those two different decisions, as suggested by advice firm LCP.
Far too often, when people access their pension, the money sits in current accounts or Isas with incredibly low returns, said Laura Myers, partner at LCP.
“The problem is that far too little attention is given to what happens to the other 75%,” she added. “This can end up in a poor value drawdown product or, worse still, be fully withdrawn and sit in a current account or cash Isa with ultra-low returns.
“Decoupling taking tax-free cash from accessing the rest of the pension pot would help savers make much better use of their hard-earned savings. I’m delighted to see that the select committee has responded positively to this suggestion and call on the government to do the necessary work to see how this change could be implemented in practice.
“The key recommendations of this report need to be implemented without delay”.
Tom Selby, head of retirement policy at AJ Bell, said that although the industry has been waiting for strong reforms to the pension system for a while, the WPC has taken a more reserved approach as it looks to “road-test” proposals first before pushing ahead with full changes.
He added: “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.”