Pension freedom starts – now people will need advice
by Dr. Ros Altmann
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Pension flexibility begins – at last more freedom, but advice needed
Buying standard annuity was like only insuring your house against fire – no help if you’re flooded or burgled
Wealthiest already have the opportunities introduced by the Budget – it’s right to give same freedom to all
Pensions more attractive now: The debate around the advantages and disadvantages of the Budget pension reforms is still raging. Make no mistake, these reforms are a game changer. Notwithstanding the importance of ensuring the reforms work as intended, the new pension regime makes pensions far more attractive and should help restore a culture of long-term saving.
Annuities deeply unpopular: The overwhelmingly positive reaction to these announcements has highlighted the unpopularity of annuity purchase. From April 2015, there will no longer be strict rules on how our pension money can be spent in later life. Just like pensioners elsewhere in the world, we will trust those who are responsible enough to save for retirement, to be responsible enough to manage their money wisely. Of course, not everyone will. Of course there will be those who blow the lot on frivolities. But that will be the minority – as evidence from Australia, America and elsewhere has shown. Fears of falling back on the state are also overdone, since means-testing of pensioners under the new single tier state pension will be vastly reduced.
Would you spend all your money on insuring your house against fire and not flood or burglary?: With full information or advice, most people would not choose to annuitise all their pension money in their 60s. Standard annuities cover the risk of living much longer than expected, but there are many other retirement risks that single life, level annuities, which most people buy, do not cover. They do not protect against inflation, do not cover a partner, do not help if you become ill or need care, or allow you to leave a legacy if you die young and do not let you to benefit from good future investment returns or rising interest rates. It is rather like buying a house and only insuring it against fire. If it burns down, the insurance pays out, but if you are burgled or flooded you have no protection.
People can now make proper decisions at retirement: Until now, people did not have to engage with decisions about their money at retirement, because if they did not have enough for income drawdown, they ended up buying an annuity almost by default. Suddenly, people will have flexibility to do what they believe is best for themselves, rather than being pushed down a particular path of buying annuities, or prevented from accessing their own money by actuarial rules on income drawdown – supposedly designed for their own good. But people will need help.
Need expert advice and new products: The challenge is to ensure people can access affordable advice that is impartial, independent and not driven by product sales, as well as facilitating new products that are more flexible and adaptable to modern life. Annuities may be right for some people, but not for all. Everyone should have real choice about how to use their pension savings, rather than being told by the financial industry that the annuity is best.
Specialist basic advice, not unregulated guidance: In future, the money spent on fees and commissions just for buying an annuity could be used, together with extra from the Government and industry, to fund specialist basic at-retirement advice to help people understand their options. More choices and options are needed to meet retirement risks that standard annuities won’t cover. In particular, those who need care may still have money left to meet the costs, whereas if they have given it all away it is lost to them.
Only fair to give same freedoms to everyone, not just the wealthiest: We must look beyond nanny state notions of what people should do and treat everyone as grown-ups. After all, those with the largest pensions – who have received the most tax relief – have been allowed to avoid buying an annuity and have had freedom to do as they choose since 2011. The Government has now extended that freedom to everyone – surely that is only fair. Pensions are finally moving into the 21st century.
Dr. Ros Altmann