A parliamentary report is calling on the government to introduce a series of reforms designed to better support savers accessing their retirement pot and tackle increased complexity.
A target should be set of least 60% of people using Pension Wise or receiving paid-for advice when accessing their pension pots for the first time, the work and pensions committee urged.
Pension Wise, government's pension advisory service, helps people aged 50 and over to make sense of their options by offering free and impartial guidance.
The pension freedoms, introduced in 2015, give people a wider range of choices over what to do with their pension, rather than being required to buy a retirement annuity.
The report said government and regulators must “end their timidity” to help savers avoid making poor decisions and in some cases ending up as victims of pensions scams.
Just 14% of pension pots are accessed after savers have spoken to Pension Wise, according to an estimate from a pension firm cited by the report.
The reason behind this could be that savers often feel pressure to use pension freedoms but the best course of action is often to do nothing with their retirement pot immediately.
The committee said that, although Pension Wise offers a good service, not enough people use it.
It also recommended that the government trials automatic enrolment into Pension Wise guidance at the point of access and age 50.
Stronger “nudge” measures, which come into force on 1 June, will require occupational pension schemes to present Pension Wise guidance as a routine part of accessing pension savings.
They must also offer to book a Pension Wise appointment for individuals, unless they wish to opt out of receiving guidance.
MPs also suggest investigating the "decoupling" of the 25% tax-free lump sum from the rest of a pension pot — potentially allowing people to take that cash and leave the other 75% in their work schemes for longer.
Currently, anyone over 55 who wants to access their 25% pensions tax-free cash needs to make a decision about the remaining 75%. This could be buying an annuity — a financial product that gives you a guaranteed income for life, taking some or all of it as cash or investing it to get a regular, adjustable income, otherwise known as "flexi-access drawdown".
Savers have six months after accessing 25% of the money built up in their pension pots to decide what to do with the other 75% and will usually have to pay tax on it.
The Treasury plans to increase the age people can access pension savings to 57 by 2028. This is to reflect the fact that people are staying in work for longer.
“Without intervention to drive up dramatically the numbers receiving advice and guidance, savers will make poor decisions,” the committee said.
Savers risk choosing a poor value drawdown product or letting the money sit in a current account or cash ISA with ultra-low return.
“We heard from some witnesses that ‘decoupling’ the 25% of a pension which is tax-free from the rest of the pot would prevent people defaulting into decisions against their best interest,” the committee said.
The MPs also raised concerns about the low numbers of people willing to pay for financial advice.
The Investing and Saving Alliance (Tisa) told the MPs that individuals not receiving appropriate guidance or regulated advice was “the biggest single issue that needs to be resolved”.
In an attempt to improve the number of people willing to pay for advice, the report also suggested the government should report annually on progress and plans to increase the uptake of pensions advice.
The Department for Work and Pensions said: “We are committed to ensuring people have the support and information they need to make informed choices about their financial futures, striking the right balance between providing vital protections and informing pension savers, while also giving them freedom and choice about how to use their hard-earned pension savings.”
Andrew Megson, executive chairman of My Pension Expert, said: “For meaningful change to occur, the government must ensure that people have better access to independent financial advice, rather than vague and generic guidance. Only then, will we see improved retirement outcomes for Britons.”
Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, called on a “new approach” to support pension outcomes as pension freedoms “are almost seven years old”.
Becky O’Connor, head of Pensions and Savings at interactive investor, said policymakers could no longer brush aside the existing lack of engagement among pension savers with the “traditional blanket response that ‘people just find pensions boring’, because the stakes are too high”.
The annual spending budget for a single person to have a minimum standard of living in retirement is currently £10,900 for a single person and £16,700 for a couple, according to the Pensions and Lifetime Savings Association.