What members need from the Guidance Guarantee
by Dr. Ros Altmann
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The majority of Defined Contribution scheme members have hitherto been effectively forced into annuity purchase, unless they had very large or tiny pension funds. As members usually received little help before committing their pension savings to this lifelong, irreversible product, many bought annuities when they did not actually need to, or purchased the wrong type of annuity. From April 2015, the new pension regime will legally require all scheme members to be offered free impartial guidance about their retirement options.
This should ensure members know what questions to consider before touching their pension fund and explain the risks and benefits of different choices. Therefore, trustee duties to members will extend beyond just accruing a pension fund. Sending members to an annuity broker at retirement will not fulfil their obligations to protect members’ interests, especially as people will have many more options.
‘Guidance’ should provide information on all pension options, on-line planning tools or decision trees and telephone or face-to-face advice for members reaching scheme pension age. It should cover the following important questions:
- Should they just do nothing, leaving their fund to grow – perhaps they are still working or have other pensions?
- Should they just tax-free cash, possibly for repaying a mortgage, housing repairs or holiday of a lifetime, but leave the rest invested.
- How to make financial plans, calculating expected retirement spending, potential income and how to cover living costs. If they need income in addition to tax-free cash, how much do they actually need.
- Explain the tax implications of cashing-in their pension fund and losing tax-free investment income or death benefits
- Explain the impact of inflation over time
- How might they provide a partner’s income or bequests if they die, or for future care needs?
- Do they want the chance of future investment returns, flexibility, liquidity and inflation protection or income certainty – and might they want guarantees against sharp market falls?
- Outline the product options and differences between them
This ‘Guidance’ will not give individualised advice that recommends the best course of action. It leaves the members themselves to decide the right answers to these questions. Therefore, it should also explain how members can find an independent financial adviser to provide a personalised recommendation, based on their own circumstances and needs, with regulatory protection against inappropriate or negligent advice.
The new Guidance Guarantee will help members make better decisions at scheme pension age and potentially obtain better value from their pension savings.