Pension Pillar - The importance of being guided

Currently, it feels like if you blink you’ll miss another new development in the pensions landscape. Whilst the industry is still coming to terms with the Retail Distribution Review, the legacy review announced by the FCA and of course the big game changer that is auto-enrolment, the Chancellor announced further changes in his Budget – and then still more were revealed in the recent Queen’s Speech.

 By Martin Palmer, Head of Proposition, Corporate Benefits, Friends Life

 The changes announced as part of the Budget centred on radical plans to give people more freedom in how they take their benefits – essentially abolishing the need to take an annuity from April 2015. With this increased flexibility comes an awful lot of responsibility for members of a pension scheme.

 Acknowledging this responsibility and the risk of retirees being left in a vulnerable position by taking their benefits early, the Budget also included plans for a ‘guidance guarantee’. Following the announcement, there has been a lot of discussion on how this will work but, a few months down the line, details still do not seem much clearer.

 The guidance ‘guarantee’ seems to amount to a commitment to give everyone with a DC pension free and impartial face to face guidance on retirement choices. The current thinking is that this will be financed by a duty on providers and trust-based schemes, backed by initial government funding of £20m. To ensure that the guidance guarantee is truly impartial and in the best interests of the consumer, it should be provided by a central utility, building on the existing capabilities of the Pensions Advisory Service (TPAS), the Money Advice Service (MAS) and Citizens Advice.

 Members coming up to retirement will certainly be in need of guidance – guidance on when to retire, how to retire and what to do with their savings. For a majority of members, some form of annuity will remain the right vehicle for their lifetime savings to ensure that they don’t run out of money. The idea of giving retirees a ‘quote’ on their life expectancy will certainly put more focus on longevity projections and is likely to be a bit of an awakening for many members, as they realise how long they will be retired and how many years they therefore will have to finance.

 There are a lot of questions that remain to be answered but this is a massive opportunity. With all the changes to pensions and taken together with auto-enrolment, pensions may even overtake ISAs in popularity – especially for those nearing their projected retirement age. A recent survey by the National Association of Pension Funds (NAPF) found that over a quarter (28%) of consumers questioned are more likely to start saving or save more into a pension following the reforms announced in the Budget.

 So for many individuals there will be a need for additional guidance and potentially advice - it will not be enough to have guidance just at retirement. It will be increasingly important for members to consider their retirement plans at least 10 years before they start to take a retirement income.

 This is important in order to ensure that they have contributed enough to be able to fund their retirement plans and to de-risk within their plan as appropriate to their needs. Financial education throughout the working life will ensure that more informed decisions can be made. Additional educational services, like seminars to understand what to expect as members approach retirement and what it will mean for them, will become ever more important.

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