At the time, critics said pensioners would blow their pots when the restrictions on withdrawals were torn up. One satirical suggestion was that the sale of Lamborghinis would skyrocket.
Steven Cameron, pensions director at Aegon, told International Adviser that the change “opened up a whole new spectrum of ways” people can use the assets they have built up.
“Pension freedoms allow people to be more creative about decumulation – they can turn one defined benefit pot into a defined contribution pot and use that to fund early retirement before other regular sources of income cut in,” Steve Webb, director of policy at Royal London, said to IA.
“Or people can opt for a phased retirement, perhaps combining part-time work with phased pension withdrawal via drawdown.”
It means that the retirement conversation has shifted emphatically from how to accumulate money to ensuring it lasts a lifetime.
Damage for clients
A recent survey found 61% of IFAs believe there has been insufficient focus on decumulation.
This begs the question: how big of an issue is it for clients?
Tom Selby, policy director at AJ Bell, told IA that the flexibilities offered by pension freedoms “present risks which need to be navigated”.
“The most obvious is the risk of running out of money too quickly,” said Selby. “This can be exacerbated if large withdrawals are combined with significant stock market falls in the early years of retirement – so-called ‘pound cost ravaging’.
“Also, tax in decumulation can be a bit of a minefield, with various allowances and tax traps just waiting to catch clients out.”
Matthew Connell, director of policy and public relations at the Chartered Insurance Institute (CII), told IA: “I think the pension freedoms have placed a huge burden on individuals to make the right choices at a very early age.
“People living to their early 80s is a normal thing, but having access to their pension in their mid 50s puts a big temptation to use their money.”
He added that people have been pressured to spend more in the early days of their retirement, leaving little in reserve for their later years.
What’s next for investors?
Retirees have been told for decades to save as much as possible for retirement. Now they need to understand how to look after their money, so it does not run out.
So, how should retail investors deal with decumulation?
“Taking financial advice can be a wake-up call for many people; for some a review of savings can be a reality check so they appreciate just how much they will need in retirement, and this could be scary,” Peter Bradshaw, director at Selectapension, said to IA.
“For others they may get comfort from knowing there’s a plan in place to meet their income needs.
“One way to overcome the fear of running out of money is to consider taking out annuities, which provide a guaranteed income for life.
“That way, the basic essential costs like utility bills can be covered.”
Brian Henderson, partner and director of consulting at Mercer, said to IA: “It can be argued that there should be no line drawn in the sand when it comes to retirement, indeed many feel that the term itself is becoming more obsolete.
“It certainly makes sense to consider and plan post retirement many years before the event. An individual’s journey should be a painless and seamless as possible.
“In an ideal world, an individual would select the outcome that best matches their ambition for retirement and start that journey as early as possible.”
The burden may be on the client to make the right decision, but this means the adviser has to be at their best when giving advice.
The CII’s Connell said: “I think for advisers there is kind of a double challenge. The first is on a technical side that they make sure they know the best way to maximise income throughout retirement and not let a client run out of money.
“Also, equally to manage the situation on an emotional level to make sure their clients feel confident to spend their money and the savings they have built up.”
Andrew Tully, technical director, Canada Life, said to IA that advisers should “want to keep clients invested for longer, to create better client outcomes”.
“The challenge of designing the right strategy to maximise the opportunities at and through retirement is right at the heart of most adviser businesses,” he added.
Training and education
There is also the issue that because decumulation is a rather new problem for financial advisers to deal with, are they trained enough?
“Yes,” said AJ Bell’s Selby. “The Retail Distribution Review has driven up qualification requirements in the advice sector, as well as placing ongoing CPD requirements on advisers.
“Understanding retirement issues such as decumulation are central tenets of this framework and any qualified adviser will have to have demonstrated understanding of the challenges, opportunities and options available.”
Tully added: “Advisers know retirement planning is a core part of their business and are fully equipped to help clients through the different stages of retirement.
“Centralised retirement propositions and investment propositions have been developed specifically to cater to this growing market and demand for advice.
“Advisers also recognise retirement planning and pension consolidation are key drivers of business growth for their businesses according to our recent research.”
But advisers need support, as they cannot cater for clients on their own.
This has seen firms in the industry roll out tools to help IFAs deal with decumulation.
These can be cash-flow modelling solutions designed by the likes of i4C Technology (recently acquired by Intelliflo), or decumulation services by firms like Brooks Macdonald, Seven Investment Management and Copia Capital Management.
The CII’s Connell said: “I think, since pension freedoms, the amount of support IFAs get in terms of software and cashflow planning has increased a lot.”
But advisers must not rest on their laurels.
“Look at what you know about decumulation and what you need to know.”
He recommends starting with what “the FCA is saying”, and “as you plan your CPD over the year, do it the right way and set objectives, and get materials that meets those objectives”.
Mercer’s Henderson added: “With the rise of fintech and now ‘pentech’, we should experience more cost efficient services to tackle the age old challenge of adviser fees.
“With advice, decumulation should be easier to manage, but charges have held back the uptake.
“It is widely anticipated that this will evolve positively over the next few years.”
“One issue that continues to hinder engagement is the sheer complexity of some of the rules savers need to navigate,” AJ Bell’s Selby added.
“A radical programme of simplification from the government, particularly around the pension tax rules, could go a long way to improving people’s understanding of pensions and retirement more generally.”
Mercer’s Henderson also said: “Disclosure is in part the answer. Retirement outcomes could be enhanced if fees and charges could be made clearer and improved.
“That together with new digital solutions should see a change in consumer experience. The FCA approach on pathways should help too. “
Canada Life’s Tully added: “We need to help people build retirement savings, rather than simply focus on what and how they can use those assets at the point of retiring.
“We should also ban the use of the word ‘decumulation’ as it means very little outside of the industry. We need to simplify the language.”