7th September 2017

Aviva: Client confusion over pension freedoms

In March 2014 Chancellor of the Exchequer George Osborne announced the most fundamental reform to the way people can access their pensions in almost a century. Since then, our industry has been talking about it for what seems like a century.

We have contemplated the future for annuities, analysed a range of retirement income strategies and invested time and money into new products. An unintended consequence is that retirement income choices have become increasingly complex compared with the government’s simple aim: to give people much greater freedom over how they access their pension savings.

The good news is that - according to the Pensions and Lifetime Savings Association (PLSA) - over a quarter (28%) of consumers are now more likely to start saving or save more into a pension following the reforms. As for those approaching retirement and looking to take advantage of their new freedoms, it’s a mixed picture, especially when it comes to terminology, impartial guidance and longevity expectations.

 Rob Yuille, Head of Retirement Policy at the Association of British Insurance (ABI) acknowledges that clients can struggle with the jargon. With UFPLS’s (Uncrystallised Fund Pension Lump Sum) in the mix, it is no surprise. The ABI is working closely with the Money Advice Service (MAS), to encourage the use of consistent language.

 As part of the reforms, the government offered guaranteed free, impartial guidance to everyone at the point of retirement, through MAS, the Pensions Advisory Service (TPAS) and Citizens Advice, with further information on the Pension Wise website. So has it worked? In October 2015 the Work and Pensions Select Committee reported that ‘fewer than one in ten people who accessed their pension pots during the early months of the reforms had taken up a guidance appointment (though many more may have looked at information on the Pension Wise website).’

Another key issue is longevity. How people appraise their pension freedoms is influenced by how long they think they might live for. In Aviva’s longevity report (published January 2015), we showed that the most likely age of death for men is 89 years. However, just over 31 out of every 100 men who reach age 89 years will live to age 90 or longer, and nearly three out of every 100 men will live to 100 years or more. Although the chance of living to more than 100 years is quite low, the chance of living to age 90 or more, at almost one in three, is something that can’t be ignored when planning retirement finances.

One freedom that is easy for clients to understand is the ability to take their pension pot as cash. The Pensions and Lifetime Savings Association (PLSA) found that one in five (19%) agreed they would take the lump sum irrespective of whether they had other savings elsewhere. They felt this suggests the number of pensioners choosing this route could be significantly higher than the government anticipates, with subsequent ramifications on retirement income and state pension-reliance. At the same time, we see others who find themselves with a pot of cash and want to know what they can do with it, with growing numbers seeking professional financial advice.

Post-freedom, the consensus in our industry is that we need to reach people earlier and have an ongoing conversation about securing income for retirement. The products are complex and the terminology is confusing. Clients frequently tell us that they don’t want us to explain what the products are, but what the products can do to help meet their individual needs. Talking to clients this way could be an area that advisers add real value.

Pensions, Protection