How pensions freedom presents a risk management challenge

Pensions freedom is good news for the consumer. Unveiled in the 2014 Budget, the reforms abolish the effective requirement to purchase an annuity, and create greater flexibility over the way in which people access their pension savings. In essence, the move hands responsibility over to the individual saver.

However, this freedom carries certain issues for pension providers, particularly from a risk management perspective. As such, many providers have been initially reluctant to go all the way in delivering full pensions freedom.

Major providers struggle to adapt to reforms

Some of the UK’s biggest pensions providers have been criticised for failing to give customers the freedoms promised by chancellor George Osborne’s reforms.

Aegon, which has two million customers, was recently revealed by the Telegraph to be preventing savers from gaining flexible access to their retirement funds until next April. Those who wish to make an earlier withdrawal are being forced to pay for expensive financial advice.

There are three options for savers who cannot afford a financial adviser:

• Cash in their whole pension, but be hit with a tax bill
• Swap the entire fund for a lifetime annuity income
• Transfer to a rival provider at a potentially high cost

Earlier this year, Friends Life – part of the Aviva group – scrapped plans to offer the new freedoms to customers, prompting ministers to voice concern that other providers could choose to follow suit.

Commenting in the wake of the Aegon news, pensions minister Ros Altmann said: “People who really do need to take their money should not be denied the chance unfairly. The real problem is the difficulty and large cost they face if they transfer to another provider.

“We are looking at this in our consultation and investigations and we want members of the public who are experiencing difficulties in this regard to let us know what is happening.”

The risk of offering full pensions freedom

The issue here is that the final rules surrounding withdrawals from pensions were only put in place as recently as this spring, while a major review into consumer access to the financial advice market is being conducted by the Treasury and the Financial Conduct Authority.

By offering the full range of freedoms outlined by the chancellor, providers are understandably going to be cautious about guiding customers to the right option. Give incorrect – or easily misinterpreted – advice, and they could open themselves up to future legal action.

Sheriar Bradbury, managing director of financial advisor Bradbury Hamilton, summed up the issue in a recent interview with Professional Adviser: “Why take on the risk of future claims from ambulance chasers – how many times have the pensions freedoms been described as the next potential mis-selling risk?”

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