In his first Guest Blog for Investment Sense, Andrew Tully, Pensions Technical Director at MGM Advantage, looks at the latest Government initiative to help people make better choices when they retire.
How will it work? Will you be entitled to it? How will it benefit you? Read on as Andrew explains all you need to know.
The Chancellor’s 2014 Budget delighted many by giving people the ultimate flexibility in when and how to take their pension savings after April 2015. Many of the headlines have concentrated on the fantastic freedom and choice being introduced. And it’s obvious that has huge appeal. But with greater choice comes greater risk, and that’s why the Government is introducing a ‘Guidance Guarantee’, offering everyone approaching retirement help working out the options available, and the consequences of their actions.
The Budget originally promised all retirees from defined contribution pension schemes, such as Personal or Stakeholder Pensions, the opportunity to receive ‘free, impartial, face-to-face advice’. Despite using the word ‘advice’ the Government has subsequently admitted this was used on the basis of ‘how most people would understand it’ rather than any regulatory definition, so in reality people will be receiving guidance. And July’s Government consultation response, which put more meat on the bones of the Budget announcements, edged back from face-to-face, suggesting most people would be happy with discussions on the telephone or gaining information from a website.
So will this ‘Guidance Guarantee’ really help people make the best decision, and how will it actually operate?
Providing the guidance to the 400,000 people who reach retirement every year is a massive job. And that highlights one of the key challenges. Offering a service to people reaching retirement is a challenge, but not nearly as big a challenge as offering an ongoing service people can access throughout their later life. But with more people easing into retirement through part-time work, and many withdrawing their pension in instalments, the need for ongoing help will only increase in future.
The Government also needs to get people to use the service. Simply requiring pension providers and schemes to tell people it is available is unlikely to achieve great take-up. Especially if it is hidden within a large pack of information a provider sends to the customer. Ideally we need to learn lessons from the current ‘soft compulsion’ approach of Automatic Enrolment. We could push people into the guidance framework but give them the ability to ‘opt-out’, provided they agree to accept the risks and consequences of doing so.
Pushing people to guidance is only the start of the journey though. To be at all effective the guidance provider, which is likely to be some form of combination of the Pensions Advisory Service and the Money Advice Service, will need details such as the individual’s pension savings, their family circumstances, their health and whether they have any debt. One solution would be to develop a simple one-page ‘pension passport’ which can be given to people approaching retirement, which they can add information to, and pass onto the guidance operator.
“Not the be all and end all”
While guidance will play an important role, it isn’t the be all and end all. Previously around half of retirees simply rolled over into an Annuity with their holding pension provider, meaning many ‘lost out’ on thousands of pounds over the course of their retirement. If many continue to roll over into the holding provider’s product, whether that is an Income Drawdown or Annuity or other solution, the market still won’t be working properly. Similarly if people simply withdraw funds from their pension and pay much higher levels of income tax than necessary we won’t be helping people achieve a good outcome.
The need for professional advice
Crucially there needs to be clear hand-offs from guidance to professional financial advice. Guidance can help people narrow down their list of options, and for some people that may be sufficient. But many will need help in working out the best option, and then deciding which provider or provider offers the optimum solution (or solutions) which best fit their circumstances. Financial advisers do that, so it is vital the guidance highlights and promotes financial advice and we have some form of simple directory which customers can use to find an appropriate adviser to help them.
The ‘Guidance Guarantee’ is a critical part of the greater flexibility being introduced at retirement. Without it we run the risk that despite more flexibility and choice being introduced many customers may end up with poor outcomes. However, building the guarantee service is probably a three year job, which needs to be completed in around six months. Much needs to happen between now and next April, but we have a unique opportunity to help people make better choices at retirement.
About the author
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Andrew is the Pensions Technical Director at MGM Advantage. He regularly writes and comments on pensions for the financial media and speaks at conferences and seminars. He sits on the ABI’s Retirement and Savings Committee and is a board member of the Pension Income Choice Association.Prior to joining MGM, Andrew was Senior Pensions Policy Manager at Standard Life, where he spent 18 years over two spells, and he also worked for Scottish Equitable as Technical Development Manager.Follow Andrew on twitter @pensionstully or visit the MGM website www.mgmadvantage.co.uk. |
