Ten years ago, George Osborne blew up the British private pension system. Because pensions are boring and complicated and move slowly, a lot of people didn’t really notice. But the shrapnel from the blast continues to ricochet today and is starting to hit.

Chancellor Osborne’s Budget on 19 March 2014 contained the surprise announcement of ‘pension freedoms’. Previously, people retiring with a Defined Contribution pension (a pot of money and very different to a Defined Benefit pension that is an entitlement to a certain income) effectively had to take their pension savings and use them to buy an annuity, a financial product  delivering an income for life.

Under the Osborne reforms, once we hit the grand old age of 55, we are all free to use our pension money however we wish. We can buy an annuity, if we really want to. We can ‘draw down’ those savings and spend them gradually to support ourselves. Or we can spend the lot on a new kitchen, or to pay household bills, or, well, anything, really.

It’s hard to argue against ‘freedom’. Who doesn’t like the idea of letting people be free to make their own choices and spend their own money?

But sometimes our own choices, freely made, have consequences for others, even if those choices involve spending our own money.

Britain’s private pensions aren’t an entirely private matter

Pensions are a case in point. We have a range of public policies that seek to encourage and reward saving into DC pension pots because it’s a good thing if people have enough money to live well after retirement. Partly because that’s good for those people, but partly because if they don’t have enough money, taxpayers have to support them.

Given the very large sums that the taxpayer currently contributes to paying state pensions, this might seem a surprising observation, but the UK currently has a relatively ungenerous approach to state pensions – because of our relatively large private pensions.  Other countries in Europe – France is an extreme – have almost no private pension wealth, but very generous state pensions.

Britain’s private pensions, therefore, aren’t an entirely private matter. Making sure that we all have a decent pot of pension savings – and that we then use those savings sensibly in retirement – isn’t a simple matter of ‘freedom’ because the decisions we all make over our pensions have consequences for others.

This is why the earlier stage of the pension process, the bit when we’re working and saving into pensions, isn’t especially ‘free’. Yes, you can, technically, do whatever you want over pension savings when you’re working. You can, if you really want to, save nothing for retirement.

But because doing so would have adverse consequences for you and the wider country, we have policies that strongly encourage (nudge) you to do at least some pension saving. This is auto-enrolment, where workers in most jobs are automatically opted into a workplace pension when they’re hired. For more than a decade, we’ve made it pretty hard and undesirable to exercise your freedom of choice not to pay into a DC pension pot. We also offer tax relief on contributions, as a financial incentive.

Overall then, our policy approach to pension accumulation is nudging and gently paternalistic, pointing us firmly in the direction of things policy makers want us to do. But pension freedoms mean that when you reach your late 50s, paternalism disappears and you’re more or less left to find your own way, usually without a map.

Essentially, for several decades of your working life the state takes the view that you should be strongly pushed into doing sensible and prudent things with your money, because otherwise you might do unwise things that led to harm for you and others. Then when you hit 55, the state steps back and says: ‘Do whatever the hell you like – blow the lot on a sportscar or a kitchen, we don’t care.’

This is jarring and inconsistent, and not just in philosophical terms. It’s received too little attention from politicians over the past decade because the slow-moving nature of pension savings and pension spending (‘accumulation and decumulation’, to use the wonk terms) mean the effects of the Osborne explosion take time to be felt. But there is some data coming through that tells us something about the choices people make with their pension savings.

Lots of that data comes from the Financial Conduct Authority’s Financial Lives survey, a major annual study of how people use their money.

It tends to lag a bit – we’re currently getting data collected in 2022 – but it’s still pretty useful. It tells us that an awful lot of people who get access to their pension pot(s) aren’t using the cash to invest and provide a long-term income that will support them in later life.

And guess what? Lots of people aren’t using those lovely pension freedoms to spend their pension savings on their income in later life.

Only 35 per cent of those who fully ‘encashed’ a DC pension in the four years to May 2022 put or plan to put their money into their current account or a savings account. By contrast, 47 per cent of those cashing out a pension said they would use it on a ‘large expense’ and 21 per cent said they would use it to pay off debts.

What is a ‘large expense’?  Well, 25 per cent said they would use their pension money for household improvements and repairs – getting a new kitchen, for instance. And 18 per cent said they would spend on holidays. Meanwhile, 16 per cent said they would spend pension cash on day-to-day living costs.

To be clear, there is nothing per se wrong with saving into a pension and then using some of that saving, in your late 50s, to get a new kitchen or go on holiday – if you have the money to do those things and also meet the original purpose of that pension saving, which is to support you through your retirement.

Over the past decade, there has been near-zero debate about pension freedoms

Quite a lot of people who cash in pension pots don’t appear to have that. Only two in five, 41 per cent, of those who ‘fully encashed’ a DC pension in the four years to May 2022 were confident that they have enough assets to last through retirement

Now, here a bit of nuance is due.  In some cases, the people cashing in a DC pension pot and splashing the cash on a kitchen or a cruise will actually be fine in later life – because that pot isn’t their only pension. If, as many people in their 50s and 60s do, you also have some entitlement to a DB pension income, cashing in a modest DC pot and flashing the cash might be a perfectly reasonable choice.

After all, the DB income is for life – no matter how long that life is.  I’d guess that some or even most of the 41 per cent who cash in DC pensions confident that they’ll be OK in later life say so because they have some DB pension entitlement as well as their DC pots.

This mixed universe of DB + DC was the setting for the Osborne reform in 2014. Yes, it was then possible to see a future in which people would hit their 60s with only DC pensions, but that scenario was at least a couple of decades in the future – long after Osborne and his colleagues would be gone from the political scene, possibly enjoying their own, very generous DB pensions.

Over the past decade, there has been near-zero debate about pension freedoms and almost no policy change. Yes, the pension freedom age is slowly rising (it’ll go from 55 to 57 by 2028) and yes there’s some deeply technical regulatory work underway on the important difference between financial ‘advice’ and ‘guidance’. But in big-picture terms, the Osborne revolution continues largely unchanged and unexamined.

Yet today, in 2024, the DC-only pensions world is rather easier to imagine. In that world, people who only have DC pots (I am one of them) will one day have to tackle what has famously been called ‘the hardest, nastiest problem in finance’.

Having accumulated a certain sum of money over our working lives, we will have to work out how to use that money to support ourselves over the rest of our lives. That will mean making guesses about how long we’ll live, what inflation will be and what our future financial and medical needs will be. In other words, predicting things that are either very hard or just impossible to predict.

We’re talking about a serious sum of cash here. According to the Pensions Policy Institute, workplace DC pensions in the UK are projected to grow from £500 billion today to £1 trillion by 2030.

And quite a lot of people are going to have to make some very big choices about how to spend that £1 trillion – quite possibly without good information or help on how to make their choices.

Nikhil Rathi, FCA Chief Executive, last week told a pensions industry conference that more than half of all pension pots accessed for the first time were accessed without their owners getting financial guidance. FCA data suggest that more than a third – 34 per cent – of over-45s with DC funds don’t really understand their decumulation options.

Rathi’s speech should probably get more attention than it’s had, because it hints publicly at something I’ve otherwise only heard discussed in private meetings in the City and Whitehall: the need to but some curbs on those pension freedoms.

Here’s Rathi:

A decade ago, pension freedoms allowed those over 55 greater flexibility in accessing pension savings.

With freedom comes responsibility, particularly given the consequences for your future.

We know that freedom tastes all the better with some guidance and steering along the way – whether it is to wear long trousers before your first bike ride, have a designated meeting point if we get off at the wrong train stop, or take a Berocca before Freshers’ night.

And it is all the more important to get that support with a pension so that you can maximise your financial freedom in retirement.

We can look to the past to see where we can learn from mistakes or how we can bolster the future.

I think you could read that as a fairly clear hint to politicians to pay more attention to the decumulation challenge, and think again about untrammeled pension freedoms. But will the politicians listen?

Right now, this stuff is nowhere on the political agenda. It’s all too technical, too complicated and too distant for politicians to focus on, especially in an election year. But as more and more people start to reach pension freedom age then consider retirement with only DC pension pots to support them, our leaders will, eventually, have to start paying attention to those of us who don’t enjoy the rock-solid retirement arrangements enjoyed by former Chancellors of the Exchequer.

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