Giving people more freedom over how they spend their retirement savings was one of the boldest things George Osborne did as Chancellor.
However, two years on from Mr Osborne’s pension reforms, the UK’s main financial regulator has flagged its concerns about the new arrangements.
Publishing the first major comprehensive study into the impact of the reforms on the retirement income market, the Financial Conduct Authority warns consumers are not shopping around sufficiently and are not taking enough advice when accessing their pension pots.
:: Drawing down pensions early is ‘the new norm’
It also warns that some may be paying too much tax as a result of their decisions. It may now have to step in to help save consumers from themselves.
Before Mr Osborne’s reforms, most people retiring with a so-called “defined contribution” or “money purchase” pension were obliged to turn their pension pot into an annuity, a product guaranteeing them a fixed income in retirement.
These had become unpopular in recent years because the income they guaranteed had plummeted as a result of ultra-low interest rates.
The former Chancellor’s solution was to remove the obligation to buy an annuity.
Instead, anyone over the age of 55 was allowed to access their pension pot and spend the money as they saw fit.
The FCA’s report confirms this has been popular.
Image: The Financial Conduct Authority has released interim findings of a study into pension freedoms
The watchdog notes more than one million pension pots have been accessed by savers since the reforms were introduced in 2015, with more than half of the pension pots emptied entirely.
That, says the FCA, is because many people mistrust pensions.
It also reflects that, in a lot of cases, these people did not have much money saved.
In nine out of 10 such cases, the pension pots being emptied contained less than £30,000 worth of savings and, in six out of 10 cases, less than £10,000.
Crucially, the FCA says this is not necessarily proof of people “squandering” their savings, as most savers making full withdrawals had other sources of retirement income and because, in more than half of all cases where pension pots were completely emptied, the money was being saved or invested elsewhere.
But there are causes for concern.
The biggest flagged by the FCA is that many people who take no advice regard money accessed from their pension pots as a “windfall”.
This is shockingly ignorant and may store up problems for the future.
Secondly, those buying “drawdown” products, where savers gradually draw money from their pension pot but stay invested in the stock market, are following what the FCA calls the “path of least resistance” and are simply buying from their existing pension provider.
This potentially exposes hundreds of thousands of people to the risk of missing out on better value elsewhere.
Worse still, with many people now shunning annuities altogether, fewer and fewer insurers are selling them.
According to the FCA, there are presently just seven companies now selling annuities on the open market.
That is inevitably going to result in a lack of competition and poor consumer choice.
No wonder Tom McPhail, head of policy at the financial services provider Hargreaves Lansdown and one of the industry’s deeper thinkers on pensions, has called the report “a regulatory cry for help” and a sign that the FCA “seems to be trying to put the pension freedom genie back in the bottle”.
Mr Osborne’s pension freedoms were supposed to offer consumers more choice with what they do with their money.
Ironically, it seems to be leading to less choice in some cases.
They were supposed to be a recognition that a lot of people could be trusted with their own money.
Unfortunately, because saving for retirement is a complex business, there are signs they may not be after all – putting many at risk of financial insecurity in their old age.
Perhaps the most damning assessment from the FCA is its warning that too many people may be paying too much tax after accessing their pension pot.
When the new freedoms were unveiled, it was not pointed out often enough that those people cashing in their pension pot may only take out a quarter of the money on a tax free basis.
To that end, “pension freedoms” looked like a cynical move by the former Chancellor to extract tax on a stealthy basis, dressed up as a consumer-friendly measure.
The report by the FCA does nothing to remove that suspicion.