How time flies. It has been just over two and a half years since the government introduced new rules allowing people greater freedom over how they take an income from their pension.
This pension game changer, the idea of George Osborne (then Chancellor of the Exchequer, now a newspaper editor), has dramatically changed the retirement landscape. For better and, sadly, for worse.
First the good bits. There is no doubt that until Mr Osborne intervened, many people got a rum financial deal at retirement, especially those who were required to turn their pension fund – work based or a personal plan – into lifetime income through the purchase of an annuity.
Although annuities can be perfectly sound retirement products, guaranteeing those who buy them a lifetime stream of monthly income, they were badly sold by most pension providers. Buyers often ended up with a poor annuity rate because they were not told of their right to shop around and bought the first annuity offered to them – by the company managing their pension pot.
Even worse, many ended up with inappropriate annuities that did not take into account key facts – for example, that they suffered from health issues, which meant they could have purchased an annuity that paid a higher rate because of a reduced life expectancy.
Only those who sought financial advice or who were financially savvy ended up with a good annuity deal. My dad, Stanley, fell into this camp. He had the nous to seek professional independent financial advice when he wanted to turn his self-employed pension into an income.
Stanley was advised to take out an annuity, which would continue paying after his death, albeit at a reduced two-thirds rate. When he died in May this year after a long (and glorious) life, it was financially comforting to know that his Aviva annuity would live on, providing an all-important monthly income for my mother, Helen.
Sadly, Dad was the exception rather than the rule. For every dad with a spouse-friendly annuity, there were probably nine others whose annuity died with them, leaving a spouse financially exposed.
Pension freedom has changed all this. Annuities can still be used by retirees to extract an income from their pension, but they have other solutions at their fingertips.
Now they can take income when they need it, rather than lock themselves into an annuity which cannot be unravelled. They can draw down income anytime from age 55 onwards. Indeed, they can even keep their pension fund invested until it suits them to start taking an income.
Yet, for all this new-found flexibility, plenty of issues need to be addressed before we can say that pension freedom is an unmitigated success.
The government has yet to stop many retirees being cold-called by companies whose sole purpose is to defraud them of their pensions. It has long promised legislation to make life impossible for these fraudsters. It never materialises. Pension cold-calling must be banned.
Access to sound financial information ahead of retirement should also be improved. Everyone aged 50 or over can seek free guidance from Pension Wise (Pensionwise.gov.uk), but this government service is under-utilised. Maybe people should be auto-enrolled into this service so they don’t miss out.
In addition, the way HM Revenue & Customs taxes income taken from pensions needs to be overhauled. In many cases, it is applying emergency tax rates to withdrawals, resulting in thousands of retirees having to go through the rigmarole of reclaiming back any overpaid tax. Surely, it cannot be beyond the wit of tax officials to make the taxation system more pension-freedom-friendly.
Finally, we need the financial regulator to get tough on those financial advisers who are persuading people to exchange benefits accumulated under work-based defined benefit pension arrangements (often known as final salary schemes) for a seemingly attractive one-off pension lump sum. A so-called transfer value.
Such transfers are tempting. They can make sense for those with an array of other pensions or who are either single or in poor health. But often the person who benefits the most is the financial adviser who arranges the transfer. This has to stop.
Fix all these gremlins and we can then talk about pension freedom being a great success story.
Jeff Prestridge is the personal finance editor of The Mail on Sunday. He won the Contribution to Personal Finance Education category at the Santander Media Awards 2016. Email him at columnists@moneywise.co.uk
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