Pension Freedoms are dangerous! That's the sentiment coming from the Organisation for Economic Co-operation and Development (OECD), an intergovernmental economic organisation with 35 member countries. According to their latest announcement, pension freedoms have made the world a more dangerous place for retirees and they have increased the risk that people will outlive their retirement savings.
The OECD have two major concerns about pension freedoms. Firstly, because now people are not forced to purchase an annuity with their pension pot, it means that the annuities market has been badly damaged which has resulted in many providers pulling out. The result? It is more difficult for those people who want an annuity to get a competitive deal.
Secondly, there is the worry that many pensioners will significantly underestimate the cost of living in retirement as well as their own longevity. This runs the serious risk of people running out of money in retirement.
These concerns have one about since the introduction of pension freedoms by the then Chancellor George Osborne. Previously, those retiring were forced to buy an annuity with their pension pot which is essentially a guaranteed income for life. Although these can be very good retirement products, many people stuck with the ones offered by their own pension provider that were poor in comparison to others on the market. Pension freedoms however gave pensioners choice with what to do with their pension pot, leaving them free to save it, invest it or simply spend it if they so wish. Speaking at the time of their introduction, the Chancellor George Osborne said:
"What I would say is that people who saved their whole lives, saved for a pension, these are responsible people," he told BBC Breakfast. "For many people annuities have not been good value… I want people to be trusted to make decisions about their future."
Pensions expert (and one time pensions minister) Baroness Ros Altmann agreed with the Chancellor at the time and said:
"This is a bombshell move that will change pensions for ever. It will stop hundreds of thousands of people a year being forced to take a terrible pension which they do not understand."
However, not everyone has always been a fan of pension freedoms and maybe their warnings should have been heeded in light of the new OECD report. Speaking at the time of the introduction of pension freedoms, National Association of Pension Funds' Joanne Segars said:
"Experience tells us that people are often ill-informed and make poor decisions about financial planning for old age. There is a recognised problem with the lack of financial literacy in the UK and there is a distinct lack of detail in today's announcement on how the Government will ensure people have access to good impartial advice so they make the right decisions about their income for retirement. We fear these reforms, without careful scrutiny, will leave a large swathe of people vulnerable to poverty in old age."
However, despite these warnings, it is unlikely the government will ever backtrack on pension freedoms thanks to their continued popularity with those retiring.