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BLOG: Why you don’t trust your pension provider

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A recent report from the FCA found some worrying behaviour on the part of retirees. Not, as some feared, that they were buying Lamborghinis, but that they were far too conservative.

Increasingly they are taking money out of their pension pots and putting it in cash or low-earning savings accounts.

This doesn’t sound like a big problem and clearly, it would be more worrying if people were taking money out, flying to Monte Carlo and sticking it all on red. However, holding it in cash does not provide an income – which all but the wealthiest retirees still need – and it doesn’t protect against inflation over the long-term. With inflation currently nudging 3%, it doesn’t take long for cash to lose its value.

The reasons for this phenomenon are diverse, but it seems likely that for most retirees it is a combination of a general nervousness about the state of financial markets, and a widespread mistrust of financial services providers, and pension providers in particular.

Both are understandable but the mistrust of pension providers is perhaps more worrying. After all, if you are worried about the state of the world, that still shouldn’t stop you buying an annuity. For the first time in a while, annuity rates are rising. A recent report by Hargreaves Lansdown shows that annuity rates are now back up above pre-Brexit referendum levels. £100,000 now buys a level income of £5,200 for a 65-year old. That’s a whole lot better sitting in cash. But if you mistrust your pension provider, you aren’t going to do that either.

Claire van Rees, partner at Sackers, says a lack of trust is stopping people making better decisions about their retirement finances. She says: “Mistrust in pensions fuelled by the prevalence of negative news stories and concern about frequent changes in pension rules is cited as a key driver for such behaviour. The pace of policy change is also identified as a reason why there hasn’t yet been much innovation in the market for retirement products post-pension freedoms. The government would be well advised to stop tinkering with pensions taxation, or risk further reducing confidence in pensions.”

Pensions are confusing and the rules are constantly in flux. Investors in pension may feel that they are paying all this money in, only for the rules to change about when and how they access their cash. Research shows that the concept of a tax credit is poorly understood, so investors only see the ‘stick’ (all the rules), rather than the ‘carrot’ (the tax relief). This is why ISAs have proved so much more popular – greater simplicity, fewer rules.

What can be done? The rules are a mess, but tinkering with them risks adding complexity on complexity. We need to live with what we have for the time being. That doesn’t mean policymakers shouldn’t move towards a wholesale change, but it should be many years in the planning.

FCA research suggests that information given by providers has limited impact on decision-making. As van Rees says, “People have fixed ideas about what they want to do, based on what they read in the media and hear from friends, family and colleagues, and think providers trying to get them to consider their options more carefully are simply ‘back covering’ or trying to delay them taking their money.” It doesn’t mean pension providers shouldn’t do it, but that it may take some time for consumers to respond.

Another option is to broaden access to advice. Currently, retirees can take up to £1,500 from their retirement pot to set against advice, but more needs to be done to incentivise them to use it and advisers to provide it. How to spend and invest a pension pot is a vitally important decision and people shouldn’t be taking it alone.

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