Pension freedoms conflict with NEST retirement products

5 October 2016, 15:25   By Samantha Smith

THE Trades Union Congress (TUC) have warned that more than a quarter of a million pension savers are being left to "fend for themselves", after 2015's pension freedoms allowed them to take money out of their savings without receiving any financial advice.

pension schemes
Credit: Ceri Breeze/

The union federation have conducted an analysis of savers in the year following the introduction of pension freedoms last April.

They found that, during this period, 300,000 people with defined contribution schemes withdrew money without taking any financial advice whatsoever.

In response to this, they're calling on the Government to update the National Employment Savings Trust (NEST) so that it offers retirement income products such as annuities and drawdowns.

And yet, while such an update may be desirable for savers, it's arguable that recent pension reforms were introduced precisely to increase the amount of money being released into the economy rather than saved.

As such, the Government may be resistant to adding income products to what NEST already provides the UK public.

Freedom not to receive advice

That said, if they are resistant, this hasn't stopped them from opening a public consultation on the matter.

It runs until Wednesday October 5th, which is why the TUC have come out with their analysis of how the new pension freedoms have been used since they were first implemented.

In addition to discovering that 300,000 people in one year withdrew money from their schemes without receiving any kind of advice, they learnt that 11,000 purchased drawdown contracts, also without advice.

These latter contracts allow savers to withdraw a regular income from their funds, which are invested in the stock market.

However, this income isn't guaranteed. Because the value of the stock market often varies, this income can vary in parallel. In fact, if the stock market falls too much or investors withdraw too much money, then they may find themselves running seriously low on funds.

This is why it's absolutely vital they seek reliable and rigorous advice before purchasing such a contract, something which the 11,000 mentioned above failed to do.

And even if they don't opt for a sometimes risky drawdown contract, previous studies have shown that some savers are withdrawing as much as 10% from their pension pots in a matter of months.

This is what the pension freedoms of April 2015 now allows them to do. With these freedoms, they can withdraw as much as they like from their pension funds, with the first 25% not being subject to income tax.

Since this presents considerable scope for abuse or misuse, the TUC are calling for NEST to provide retirement income products that offer low- and middle-income savers more reliable and accessible ways of using their pensions.

Without such provision, the union federation fear that there will be a "rise in scams and more older people suffering hardship."

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Their idea may be sensible, yet it nonetheless conflicts somewhat with the logic that resulted in the pension freedoms being established.

Namely, while the then-Chancellor George Osborne talked about "giving hard working people real choice over their money," other pension reforms suggest that he and the Government simply wanted people to save less.

For example, in 2006, the Labour Government set an annual pension allowance at £215,000.

This meant that people could put away £215,000 a year before their savings were hit by pensions tax.

However, by April of this year, it had been gradually reduced to the low of £40,000, acting as a disincentive to saving in excess of what the Government thinks people should save.

While these may be justifiable changes in the context of an economy that still hasn't truly recovered from the financial crash of 2007/8, they show how the Government would prefer that we released more of our pensions and savings into the wider economy.

Decreasing annuities

Yet as invigorating as this may be for the economy, it suggests that the Government are reluctant to require NEST to arrange annuities for thousands if not millions of people.

The uptake of annuities decreased markedly after the pension freedoms were first announced, since people begin choosing to use their funds more liberally rather than to keep them locked up.

This decline was what the freedoms were partly designed to cause, so the idea that the Government will now go back on their own designs and require opt-out annuities has something particularly contradictory about it.

At the very least, they won't go back on their designs until the UK economy reaches the kind of financial health and confidence it enjoyed in 2007. And given that the status of this economy is still uncertain in the wake of Brexit, we might be waiting for some time before they do.

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