Take-up of pensions guidance and advice

Fintan Codd; James Mirza-Davies

Documents to download

Take up of pensions guidance and advice (486 KB , PDF)

Download ‘Take up of pensions guidance and advice’ report (486 KB , PDF)

Nigel Mills MP set out the purpose of the debate in a statement on the Parliament site, as follows:

I am leading this debate to request that the Government support or sponsor trials to default people nearing retirement age into the free Pension Wise service provided by the Money and Pensions Service.

Take up is currently very low, and while the Financial Conduct Authority have plans to increase it a little, there’s no target set and I have no expectation that they will get to any sizeable level.

If access to the service isn’t improved, some people may get scammed out of their savings, but probably a bigger cohort just opt for the easiest decision without understanding the range of options open to them.

Individuals looking to make decisions about their pensions can seek both advice and guidance:

Advice is a personalised recommendation and can only be provided in the UK by firms which are regulated by the Financial Conduct Authority and which are on the Financial Services Register.
Guidance is a broader term including general information and signposting about pensions. Guidance does not include a recommendation but can be offered by any organisation.

The Pension Freedoms

In the 2014 Budget the Government announced a major reform in the tax rules which restrict the ability of those saving into a defined contribution (DC) pension to access those savings. DC schemes provide a pension pot based on the value of fund on retirement. The level of pension depends on factors such as the level of contribution paid and investment returns. The pension freedoms meant that, from 6 April 2015, people aged 55 and over would be able to make withdrawals from their DC pension pot “at a time of their choosing, subject to their marginal rate of income tax.” The broad options available to a person accessing their DC pension for the first time are outlined below:

Annuity: An annuity provides a regular income for life or a set period. The income from an annuity will depend on a number of factors
Drawdown: Pension drawdown can provide a regular income by reinvesting it in funds designed for this purpose. The income is not guaranteed and varies depending on the fund’s performance. The pension freedom removed the limits on the amount of income which can be taken from drawdown funds. Since February 2021 people choosing drawdown should be offered a choice of investment pathways.
Cash withdrawals: Cash withdrawals can be taken straight from a DC pension pot after age 55 with the remainder left untouched. Normally the first 25% of a fund withdrawn is tax free and the remainder is treated as taxable income.
Withdrawing whole pot as cash: From age 55 a person can withdraw all of their pension pot as cash. Normally the first 25% of a fund withdrawn is tax free and the remainder is treated as taxable income.

People can choose one or a combination of the options above and they are not required to remain with one pension provider.

People with defined benefit (DB) schemes will receive a regular pension income, guaranteed by a sponsor. Unless they transfer out of their scheme, members of DB schemes do not usually need to make a decision about how they access their pension. They may face decisions about when to access their pension and some schemes offer a lump sum alongside the regular income.

Pension Wise

A “guidance guarantee” was presented by the then Government as part of the introduction of the pension freedoms to support the increased flexibility given to consumers accessing their DC pension savings. The guarantee entitled everyone with a DC pension fund to free, impartial guidance, which is provided through Pension Wise. The 2014 Budget stated that “The government recognises that under the new system it will be important that people are equipped to make decisions that best suit their personal circumstances.”

The Financial Guidance and Claims Act 2018 requires the Financial Conduct Authority and Secretary of State for Work and Pensions to make regulations requiring pension schemes to refer members to appropriate guidance. The Act also enabled the creation of the Money and Pensions Service which is responsible for delivering Pension Wise.

Stronger nudge to pensions guidance

In July 2020 the Money and Pensions Service published the results of behavioural (or “nudge”) trials to increase the use of Pension Wise in line with the Financial Guidance and Claims Act 2018. Excluding people who said they had already taken guidance or advice in the past 12 months, the trial found that 11% of people receiving the “stronger nudge” attended a Pension Wise appointment within 6 weeks, compared with less than 3% in the control group.

In May 2021 the FCA launched a consultation on booking Pension Wise appointments for the schemes it regulates. The consultation proposed including the most successful measures from the nudge trials into its rules. The final rules for contract-based pension schemes were set out by the FCA in a policy statement in December 2021. When a consumer has decided, in principle, how to access or transfer for purposes of accessing their pension savings, the pension providers will be required to:

refer the consumer to Pension Wise guidance
explain the nature and purpose of Pension Wise guidance and encourage the consumer to take the guidance
offer to book a guidance appointment and where the consumer accepts that offer, book the appointment or provide the consumer with sufficient information to book their own appointment

Providers will also need to confirm and record if someone has opted out of Pension Wise guidance. The FCA’s rules will come into force on 1 June 2022.

On 9 July 2021 DWP launched its consultation on the stronger nudge to pensions guidance covering occupational pensions and published its response on 17 January 2022. The Occupational and Personal Pension Schemes (Disclosure of Information) (Requirements to Refer Members to Guidance etc.) (Amendment) Regulations 2022 were laid on 17 January 2022 and will come into force on 1 June 2022.

Under the FCA’s rules people in contract-based schemes could opt out of Pension Wise guidance in the same communication with their provider as it is offered. Under DWP’s regulations people in occupational pension schemes would have to opt out of Pension Wise guidance in a separate communication with the scheme unless a specified exemption applies. The FCA have said that its rules “provide flexibility for providers who offer both contract and trust‑based pension schemes to adopt DWP’s proposed opt-out process where they consider it appropriate.”

Automatic guidance

On 18 January 2022, the Work and Pensions Select Committee published its report Protecting pension savers—five years on from the Pension Freedoms: Accessing pension savings. Witnesses giving evidence to the Committee’s inquiry, including the Association of British Insurers, said that automatic Pension Wise appointments should be trialled. Both the Money and Pensions Service and Financial Conduct Authority told the Committee they would be willing to consider an automatic appointment trial. Concerns about automatic appointments were also raised, including savers having to attend multiple appointments and the cost of unattended appointments. The Minister for Pensions and Financial Inclusion said that automatic Pension Wise appointments would require new primary legislation and the Department estimates that the cost of auto-appointments is between £45 million and £80 million.

The Work and Pensions Committee concluded that Pension Wise is a “well regarded and under-utilised service” and that the proposals by DWP and the FCA would “not be enough to make receiving pensions guidance the norm.” The Committee made two recommendations:

We recommend that the Government sets a goal for the Money and Pensions Service for the combined use of Pension Wise and paid-for advice when accessing pension pots for the first time. This goal should be at least 60 per cent and expressed in terms of individuals rather than pots. It could include an exemption for smaller levels of saving.

And:

We recommend that automatic Pension Wise appointments are trialled. The Government should initiate two trials: one with an appointment when a person accesses their pension for the first time and another at the age of 50, before they can access their pension savings.

The Government’s response to the Committee’s report has not yet been published.

Further reading

1)News/blogs (2022-)