Since pension freedoms were introduced three years ago, a total of £21.7bn has been withdrawn from pensions according to HMRC figures. The number of payments increased from 296,000 in the second quarter of 2016 (when reporting became compulsory), to 585,000 in the third quarter of 2018.
However, although demand for pension flexibility has increased, advised platforms have not embraced the trend by creating functionality that offers people a full range of options at retirement or making the process efficient for advisers. In fact, the FCA stated in its Retirement Outcomes Review Final Report in June that product innovation has been limited, despite expectations that new products would be developed for mass-market consumers combining drawdown flexibility with guaranteed income.
In general, mainstream platforms remain focussed on accumulating assets, rather than on providing choice in the decumulation phase. Advised clients have fared slightly better than direct consumers, with some specialist at retirement providers offering greater flexibility within their pension range, but within mainstream platforms, significant gaps in pension withdrawal functionality remain.
Of the 21 advised platforms included in the lang cat Platform Directory, two currently only offer four of 11 pensions functions listed, which include capped drawdown transfer in, guaranteed income products, pensions technical support and annuities. Advisers managing withdrawals from retirement savings will find that even fairly basic capabilities such as uncrystallised fund pension lump sum (UFPLS) and natural income options are missing from some platforms, while functions such as single, consolidated income payments and tax-efficient withdrawal tools are also conspicuously absent from a number of platforms. Most offer six or seven of the listed functions and one offers ten, but no single platform offers the full range.
Last March, the DWP acknowledged that “new, innovative retirement solutions are needed that will meet consumers’ needs.” However, they considered the post-freedom pension market as still evolving, and that product innovation would progress as the reforms become more established. The FCA shared this sentiment in the Retirement Outcomes Review Report, saying that they want the market to have time to develop, and therefore they’ll take no action on product innovation at this stage.
This is frustrating, though, when recognising that the demand and activity is already there. According to the Retirement Outcome Review Report, customers are already performing a diverse range of functions in this post-freedom market. Over half (54%) of those who have accessed pension pots for the first time between October 2016 and September 2017 withdrew these pots completely, with a further third (30%) opting for drawdown, 13% chose annuities and the remainder (3%) uncrystallised fund pension lump sum (UFPLS). Although all advised platforms offer drawdown, two do not offer UFPLS and none offer annuities. In addition, previous lang cat research has found that not all platforms can manage the whole process of pension withdrawals online, with some requiring paper applications or a wet client signature.
The technology exists to provide the full range of options, so why, over three years on from pension freedoms, is it not yet possible for advisers to access these on their main platform?
Research by pension providers has consistently found that people want flexibility in retirement, often with the security of a guaranteed income, the ability to withdraw ad-hoc lump sums and the opportunity to grow the value of investments and leave a legacy. Technology can help platforms, as with some of the specialist providers, to combine drawdown and guaranteed income solutions within a single pension wrapper, offering more flexibility over how and when income can be taken, greater control over management of tax liabilities and more options for beneficiaries over death benefits. It is also possible to integrate this functionality with other client solutions to offer a truly flexible retirement plan.
Three years on from the introduction of pension freedoms, many retirees are still unclear about the appropriate pension income options available to help ensure their pension lasts until the end of their life. By having access to more pensions functionality on platforms and supplementary tools which illustrate how different options are likely to impact their pension income or ongoing investments, advisers can better help clients navigate those complicated at retirement decisions.
Pension savings account for nearly half of the assets held on advised platforms, so there is clearly a market for pensions-friendly functions and tools on platforms. With the sector set to continue to evolve and grow, driven by auto-enrolment as well as pension freedoms, it seems likely that access to this functionality will play a more important role in advisers’ due diligence in future. It will guide platform selection, forcing more platforms to adopt greater decumulation functionality or risk losing market share.
ONS data released in February, found approximately 50% of personal pension wealth is held by people aged over 50, while the Retirement Outcome Review Report stated that 72% of consumers who accessed their pots did so before the age of 65. This suggests that the next decade will see a steady shift from accumulation of pension assets into decumulation.
Platforms need to catch up with demand by using currently available technology to provide tools and online functionality that help advisers take their clients through complex at retirement options. Providers should take advantage of the at retirement capabilities available to them to deliver pension freedoms as intended and secure a competitive advantage.
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(Originally published in FT Adviser)
Posted in: Wealth Management Administration
