Last week’s announcements on how the Government plans to implement its new rules on annuities mark a seminal moment in the on-going pension revolution. Some necessary flesh has been now added to the bare bones of the Budget bombshell that savers in DC schemes would no longer have to convert their pension pots into annuities. But at the start of most revolutions, it is usually hard to predict where they will end. This is particularly true of this one. What seems to be clear, however, is that if this revolution is to lead to greater incentives to save (which should perhaps be the real goal behind all of these changes) and more real freedoms to enjoy the sacrifices savers make over their lifetime, then clear, professional independent advice at key stages along the way is going to be of first order importance.
At first glance there is much to be welcomed in last week’s announcements. The advice savers will receive on their new options will be given by totally independent agencies in the form of The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS). This is absolutely right and proper. If we want to avoid another mis-selling scandal then the people with products to sell should not be the ones to give this all important guidance. It will be funded by a new levy on the industry. This too is the only sensible way to proceed. Savers should not be required to pay for this essential service. The advice will be provided at the end of the accumulation phase of the savings journey. It will probably last 30 minutes and then the saver will need to have their own direct conversation with their pension provider. Three obvious concerns should be raised about this new structure.
First, it is hard to see how 30 minutes will be sufficient. Decisions made here will have enormous implications both for the individuals concerned and ultimately for our society as a whole. Do we really think we are giving people enough help and support? Second, savers might still find themselves in an unequal relationship with their pension providers at the moment when actual decisions about how to exercise their new freedoms are being made. TPAS and MAS will not be in the room when these all-important meetings take place. Are we taking effective steps to mitigate the risk of mis-selling? Third, it is surely the case that savers will need more regular and informed advice at regular points in their working lives about whether or not they are on course to enjoy the sort of living standards they might aspire to in retirement. Having a 30 minute conversation at the very end point of saving is probably not going to be good enough. What more information should we be expecting pension providers to give over the lifetime of a person’s saving?
I believe the Government is pursuing broadly the right steps long this path of reform. It should lead to significant market innovation in the form of new retirement income products. This is long overdue. And we should place decision making at the point of retirement more firmly in the hands of those who have done the right thing all their lives and saved for their retirement. However, we must not lose sight of one important fact in all of this – that welcome though these reforms are, most people are simply not saving enough for their retirement. Giving savers more options over how they use their savings is fine and entirely reasonable – but we have to start the debate soon about the inadequate level of pension saving in the UK. Auto enrolment gives us this opportunity. We should seize it with both hands.
Please note that all opinions expressed in this blog are the author’s own and do not constitute financial legal or investment advice. Click here for full disclaimer