The Chancellor George Osborne heralded nothing short of a ‘pensions revolution’ in the last Budget, announcing that from April 2015 pensions savers from age 55 will be able to cash in their defined contribution pension plans if they wish, subject to taxation at their marginal rate, and will no longer be required to purchase an annuity or keep their pension running.
This huge increase in flexibility has been widely welcomed and should help rehabilitate the often negative perception of pensions among the wider public as schemes which lock up their money for good. Yet it also carries the risk that people will make choices that leave them unable to fully fund their retirement.
While tongue-in-cheek comments by pensions minister Steve Webb that retirees could use their proceeds to purchase Lamborghini sports cars if they wished have previously captured the headlines, the more likely scenario is that large numbers of people will be tempted to cash in their pension to purchase property, such is the UK’s love affair with residential housing.
To address the concern that people will make rash or uninformed choices leaving them unable to fully fund themselves in later life, the Treasury has now announced that free ‘guidance’ on the options for will be provided by a range of quangos upon retirement.
While clearly it will be helpful for retirees to get some generic explanation of the options available to them on retirement, it is important to also recognise contrary to some media headlines, it will not be “advice”, and it will have limitations.
Firstly, people need to develop a retirement plan many years ahead of retirement in order to secure a decent outcome. An adequate financial position in retirement is all about understanding the required level of savings that need to be made, use of tax efficient plans such as pensions and ISAs to get there and of course the selection of high quality of underlying investments is of paramount importance. None of this will be provided under the free pensions guidance guarantee which is aimed at helping people only at the point of retirement.
Secondly, while generic guidance on the range of options available such as cashing in a pension, purchasing an annuity or keeping the pension plan running and drawing an income is important, ultimately most individuals will still need help selecting a specific solution such as which annuity or which funds to choose from the thousands of options available.
After all, the biggest problem with the annuities market to-date has been the failure of most people to shop around when choosing an annuity and to simply go with the default option available from their pensions providers, when they often could have secured a better income stream elsewhere. Selecting a decent retirement solution, whether a portfolio of funds, an annuity or something else will still require expert help.
In summary the ‘guidance guarantee’ will only work effectively when dovetailed with the services of regulated firms of financial intermediaries who research the wide range of product options available.