Providers must offer Pension Wise appointments to customers accessing pensions

From June 2022, contract-based pension providers must refer customers to Pension Wise guidance, explain the nature and purpose of that guidance and offer to book an appointment when the customer decides to access their pension savings¹. The Financial Conduct Authority published its final rules on the measure in December 2021¹. The requirement applies to contract-based schemes; the Department for Work and Pensions consulted separately on a stronger nudge to guidance covering trust-based schemes, in a consultation launched on 9 July 2021¹.

Pension Wise was created to deliver the guidance guarantee that accompanied the 2015 pension freedoms, and is now part of the Money and Pensions Service¹. Under that guarantee, everyone with a defined contribution pension is entitled to free impartial guidance from Pension Wise when they come to access their pension¹. The Work and Pensions Committee, in a report published on 18 January 2022, set out what providers would be required to do from June 2022¹.

The change sits alongside other requirements on how pension pots are accessed. Since February 2021, defined contribution drawdown providers have had to offer non-advised consumers a choice of investment pathways depending on how they plan to use their money¹. The Committee described these as ready-made drawdown options introduced for contract-based schemes in 2021¹. Providers' own customer pages state the Pension Wise referral duty as taking effect from 1 June 2022².

The context is the scale of flexible access since April 2015, when people aged 55 and over became able to make withdrawals from their defined contribution pension pot¹. The Committee reported that some 1.7 million people have withdrawn over £45 billion flexibly from their pensions¹. It also reported that in 2019/20, for the pension plans the FCA regulates, 10% of those accessed were used to buy an annuity, compared with over 90% before the pension freedoms¹.

People can usually take up to 25% of their pension as a tax-free lump sum, with income tax paid on the remaining 75%¹. People with a defined benefit pension worth over £30,000 must take paid-for advice before transferring¹.

Why it matters for households

Anyone with a contract-based defined contribution pension who decides to access it, typically from age 55, will now be referred to Pension Wise and have the guidance explained to them, with the option of an appointment booked¹. The duty bites at the point of access rather than at the point of saving, so it applies to people taking cash, buying an annuity or moving into drawdown¹. The guidance is free and impartial, and the entitlement covers everyone with a defined contribution pension¹.

The practical effect is a step between deciding to take money and the transaction itself. Providers must explain what the guidance is and offer to arrange it¹. The rules were made by the FCA for contract-based arrangements, while the parallel approach for trust-based schemes was consulted on separately¹.

For households, the timing of access affects tax. Withdrawals are taxed at the person's marginal rate in the year they are taken, so the amount taken in a single tax year changes the bill¹. Taking taxable income from drawdown also reduces the annual defined contribution contribution limit to £10,000². Drawdown income is not guaranteed and can fall with investment performance, and taking too much too quickly can exhaust the pot¹. Money in drawdown can also affect entitlement to means-tested state benefits².

What happens next

The requirement took effect from June 2022 for contract-based providers, following the FCA's final rules in December 2021¹. The DWP consultation on the stronger nudge for trust-based schemes, launched on 9 July 2021, covered those arrangements¹. The Work and Pensions Committee said its final report in the series would look at saving for later life¹.