ABI has said that five years on from the launch of pension freedoms, the idea of “cash today, poverty tomorrow” must be prevented, as pension withdrawals could result in poverty later in life.

The report has revealed that full withdrawals have risen to their highest level. since the freedoms were introduced: 40% of withdrawals were at an annual rate of 8% and over, which is not sustainable. On average, withdrawing 3.5% from a pension pot annually should ensure a 95% chance of not exhausting savings in retirement; but withdrawing 7% only delivers a 60% chance of not running out of money.

The organisation has urged that further reforms and safeguards are necessary to ensure the long-term sustainability of the pension freedoms.

ABI’s latest report ‘Five years on: future-proofing the freedoms’ provides key recommendations including steps to tackle advice and guidance ‘black holes’, schemes giving mandatory risk warnings if people ask for transfers out of final salary schemes, later life financial reviews, and banning unregulated investments.

Recommendations include:

• Regulators should use the greater flexibilities post-Brexit to adapt rules on guidance and advice to achieve a step change in the support available to customers.
• The Department for Work and Pensions should require defined benefit pension schemes to provide scheme members who wish to transfer their pension to a defined contribution scheme with a letter warning of the risks.
• The Money and Pensions Service should develop a later-life review to help people plan during their retirement, and implement the lessons from recent trials for a stronger nudge to guidance, especially as latest data from the FCA shows that, in 2018/19, nearly half -48% - of people accessed their pension pots without getting registered advice or guidance.
• The Government should set up a Retirement Commission to advise on policy changes needed for good customer outcomes in retirement.
  The industry will undertake more research into how people can be supported to make sustainable withdrawals to ensure they don’t run out of money prematurely.

Huw Evans, ABI director general, commented: “The jury is still out on the success of the pension freedoms. We will only be able to judge their true impact decades from now, once it is clear whether those who have exercised their choices have the retirement that they were hoping for.”

“The pension freedoms have revolutionised retirement finances, giving people greater flexibility with their pensions, including being able to take all or part of their pension pot as cash, buy an annuity to provide a guaranteed lifetime income, or to ‘drawdown’ an income from the pension, while it remains invested.

“But the changes have also placed much greater responsibility on savers to ensure that they make the retirement choices that are right for them. Further reforms and safeguards are needed, as too many people are making complex and vital retirement decisions without help. According to FCA data in 2018/19 nearly half -48% - of people who accessed their pension pots did so without regulated advice or guidance.

“Many of the current generation of retirees benefit from final salary pensions, which provide a guaranteed retirement income while they use other pension monies flexibly. But final salary pension schemes are in decline, and future generations will increasingly rely on pension savings without such guarantees. This makes it vital that they can access guidance and advice to help them make such decisions.”