Freedom breeds complexity

June 18, 2015 SSP Limited

With over 30 years’ experience in financial services, Graham Cross CEO for Helm Godfrey highlights the importance of education and advice in making any financial decisions.

Since April 2015, individuals aged 55 and over with a defined contribution pension savings 
are entitled to access their pension savings as they wish, subject to their marginal rate for income tax (rather than the previous 55% charge for full withdrawal). This is most fundamental change to how people can access their pension savings in nearly a century. By giving choice back to the individuals and trusting them with their own finances, individuals now have the freedom to make decisions to suit their own circumstances.

The new pension freedoms have received mixed press. Detractors say this may lead to people ‘frittering away’ their pensions in splurges on luxury items such as cars and holidays, only to face long years in retirement with insufficient income on which to live and with the state picking up the tab.

Some early reports from pension providers suggest this is a valid concern. Standard Life report that the majority of the calls it received in the first week of pensions freedoms (in excess of 5000!) were from customers looking to fully or partially cash in their retirement 
savings. Royal London had a similar experience, highlighting that paying off debts, such as mortgages, were a major reason for cashing in. 

Another criticism is that the pension freedoms are an opportunity for fraudsters to entice unwitting savers into parting with their retirement pots and investing them in get-rich quick 
schemes that promise much and deliver little. Those who support pension freedoms argue it is only right that people should be allowed to spend their savings as they wish. They also 
point to the poor value available from annuities over the past few years, where pensioners were previously largely forced into taking them out. The pension freedoms may mean 
pensioners can achieve a better outcome than they would have received from buying an annuity. 

As far as it costing the state money, advocates of pension freedoms say it is only likely to be a very small minority who will spend their entire pension pot without a thought about the long-term consequences. They also allude to the increased tax revenues forecast to be generated 
by people cashing in. 

Whether these short-term revenues will outweigh any possible long-term burden on state finances from people who run out of money is as yet unknown, just as it is too early to say what any wider consequences of the policy will really be. 

But I think the majority will tread more carefully. A person who has prudently saved into a pension over their working life is likely to understand the need to have a sufficient income during retirement. This takes priority over fancy holidays, fast cars and speedboats. 

However, this does not mean that I do not have concerns. Just because someone realises they need to use their pension savings for a retirement income, does not mean they are equipped to make the right decisions about how to achieve it. One thing that can be said for annuities is that they are relatively straightforward. A person hands over a lump sum and in return receives a guaranteed income for the rest of their life. Simple. 

Post the pension’s freedom, greater choice equals greater complexity and more opportunities to make mistakes. In addition to annuities, there are various flexible drawdown style options available and the early signs show that these will grow in popularity.There is also talk of proliferation in new products coming to the market, from relatively mainstream variable annuity options and lifestyle funds, through to alternative and esoteric investments that are likely to suit a small minority. Each of these potentially represents a competing voice vying for savers’ money, creating what may be a chorus of confusion for non-financially savvy consumers. 

There is therefore a huge need for education and advice to help people avoid making bad decisions that could impact their future financial well being. The government recognises this and has established the Pension Wise service to address the issue. Whether it will do the job adequately is another matter. A recent report highlighted that while pension providers were being flooded with thousands of calls a day, Pension Wise itself received just a few hundred. 

This may of course change as the service becomes established and is more heavily promoted following the General Election (promotion of government services are legally restricted during a General Election period). But there is also the question of how useful the general guidance will be in comparison to personalised advice?

Pension Wise will provide 
objective information, guide people through what’s available to them, encourage them to think about their needs and required income in retirement, factoring in any savings and investments held, considering any tax implications and explaining to users the potential benefits of shopping around for the best deal. 

On the face of it, such help will be extremely valuable but there may still be a lot to organise, from making potentially complex financial calculations, to asking providers the right questions to ensure they are fully armed with the facts to make good decisions. Not all consumers will be able to make the most of the guidance they have been given. Providers themselves will be keen to retain pension money on their books. If they do this by offering 
customers genuinely good deals, then great. But previously insurance companies have long relied on a combination of consumer ignorance, inertia, and financial jargon to sway customers into making decisions that are better for them. 

Whether pension freedoms will change this remains to be seen. And with or without Pension Wise’s guidance, in the absence of clear personal expert recommendations, many people may still simply choose the path of least resistance or make an ill-judged decision. 
Someone receiving personalised advice from a highly qualified, UK regulated adviser would do neither of these things. Professional advice should always result in the best possible outcome for a client based on their circumstances at that time.

At Helm Godfrey, we have found that clients are using pension freedoms to take their full pension pot in cash, provide an income at retirement or, plan to bequeath the pension pot as part of their estate. However, for the majority, it is a combination of all three available options. By seeking advice, consumers can be sure that they have peace of mind that the decisions being made will be tax-efficient and appropriate for their individual circumstance.

About the Author

SSP Limited

As the leading global supplier of technology systems and software for the insurance industry, our role is to help insurers and brokers operate more efficient businesses. So whether you’re a global insurer or an MGA, a high street broker or a start-up with a smart new idea, we can be trusted to support you on your journey, whatever the destination.

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