Colin Clarke: There is a clear need to complement the innovation of the pension freedoms with stronger guidance and a focus on paying an income for life
This Sunday, 6 April 2025, marks a decade since the introduction of the pension freedoms, a landmark policy shift that granted individuals aged 55 and over greater access and autonomy over their retirement pots.
No longer obligated to purchase an annuity, the reforms sought to align pensions with other financial assets. The decision was hailed as a step towards greater individual financial empowerment, and a decade on, the landscape continues to evolve.
How the pension freedoms changed behaviour
Prior to 2015, annuities were the default choice for three-quarters of defined contribution (DC) pension holders, offering a guaranteed income for life1. The pension freedoms altered this trajectory, with more retirees opting for income drawdown and lump-sum withdrawals. The shift fundamentally changed the way individuals engage with their retirement savings, leading many to prioritise immediate financial needs over long-term security.
At Legal & General (L&G), our data highlights some of the unintended consequences: 21% of individuals who withdrew a lump sum from their pension did so as soon as they were able, often to cover expenses (32%) or simply to have cash on hand (46%). Critically, 58% did so without seeking professional financial advice or guidance, exposing themselves to unanticipated tax liabilities and potential reductions in means-tested benefits2.
Meanwhile, drawdown gave people the flexibility to take what they needed, when they needed it; but has led some to deplete their savings too soon. Our research suggests that many retirees are now facing significant funding gaps, with nearly a decade of retirement potentially left unfinanced due to early withdrawals3.
Beyond individual financial decisions, the broader market implications of the pension freedoms have been profound. The annuity market, once the cornerstone of retirement planning, saw a decline in the years following the reforms.
Many providers exited the space, and the perceived value of annuities diminished. However, with preferable rates and increasing concerns about longevity risk, the annuities market has rebounded to levels not far off pre-pension freedoms. A guaranteed income has once again become a key priority for many due to the certainty it provides both in magnitude and longevity of payments.
Where do we go from here?
The flexibility offered by the pension freedoms is of course important, reflecting the highly personal experience of many retirees and the need for a system that doesn't dictate a ‘one-size-fits-all' approach. However, the lack of sufficient guidance has left many individuals navigating complex financial decisions without the necessary support. Against the backdrop of the shift from defined benefit (DB) to DC pensions placing more responsibility on individuals, a knowledge gap is emerging.
A key issue is that while many people understand the importance of their pension, few have the confidence to make strategic long-term decisions. And as the industry knows, many savers underestimate how long retirement will last.
Looking ahead, several industry developments signal a shift towards a more structured approach, and a greater focus on the importance of assuring a stable retirement income:
- The introduction of the pensions dashboards: This is set to transform consumer engagement by giving full visibility to retirement savings but crucially, reframing them in terms of estimated future income rather than pot value, providing a clearer picture of later-life. This shift in presentation is critical, as L&G's research shows that consumers will often assume large lump sums convert into greater income than it will in reality.
- The value for money framework: The Financial Conduct Authority (FCA) is consulting on a framework aimed at improving long-term value from default DC workplace schemes, helping savers to achieve sustainable retirement incomes, with the Department for Work and Pensions (DWP) and The Pensions Regulator (TPR) expected to follow suit after the passing of the Pension Schemes Bill. This initiative seeks to establish clear benchmarks for pension products, encouraging transparency and competition to drive better outcomes for members.
- Enhanced decumulation support for members of trust-based schemes: The DWP is planning to introduce new measures for trustees to provide greater support for their members both at and into retirement, which is also expected to be in the Pension Schemes Bill.
- Stronger guidance efforts from providers: There is increasing momentum behind initiatives that provide people with financial guidance before accessing their pension savings. Here at L&G we recently launched a new guided retirement planner to help bridge the knowledge gap, deliver better retirement outcomes for our 5.5 million DC workplace members and to counteract low levels of engagement and financial confidence. The FCA is also consulting on a new Targeted Support framework to close the gap between advice and guidance. This will deliver a step-change improvement to the help that pension providers can deliver to their members and be able to suggest options suitable for people in similar circumstances to them, simplifying decision making.
- The ongoing resurgence of annuities: With increasing longevity and concerns over financial security in later life, annuities are regaining relevance as a dependable source of income. At L&G our research has shown that the benefits of annuity go beyond just their rate-driven value, but they also provide improved lifestyle outcomes for retirees, as they provide security and certainty4. With a growing focus on wellbeing within our culture, this shift in attitude could sustain the relevance of annuities.
The pension freedoms have undoubtedly introduced a greater degree of personalisation into retirement planning, acknowledging the diverse financial needs of retirees. However, with a decade of insight into its resultant impact on consumer behaviour, moving forward there is a clear need to complement its innovation with stronger guidance and focus on the primary purpose of a pension to pay an income for life. By leveraging these insights, we can support more informed decision-making—bridging the gap between autonomy and long-term financial security.
Colin Clarke is head of product policy strategy for workplace savings at L&G
Notes:
1 FCA Retirement Income Market Data 2023/24
2 Research conducted, on behalf of Legal & General, by Opinium between 3-9 December 2024, among 3,000 UK over 50s
3 Calculations are based on the following assumptions:
- Inflation = 2.5% p.a.
- Expected life expectancies from Office of National Statistics calculator: Life expectancy calculator - Office for National Statistics
- Investment return on pension pot calculated based on CAPA average portfolio one day before state pension age (as at 31 December 2023), with 33% held in equities (5.5% p.a.)
- Initial tax-free cash lump sum of 25% of the pension pot taken at age 60
- Regular withdrawals assumed to commence from age 67 (current SPA), with withdrawals assumed to increase with inflation until pot exhaustion
- Assumed no other sources of income, e.g. property wealth or defined benefit pension
4 Analysis was conducted by the Happiness Research Institute on a population-weighted sample of 3,000 UK retirees that responded to a cross-sectional online survey conducted by Opinium in April 2024. The happiest retirees were defined as those with a life satisfaction score greater than the sample median. To estimate average income figures, the middle value of each response option income range was assumed. Multivariate-adjusted regressions were conducted to estimate risk and odds ratios.
