The Financial Guidance and Claims Bill is debated by the Public Bill Committee today as the Government faces pressure to back a House of Lords amendment which would see savers automatically enrolled into guidance when they access the pension freedoms.
Pensions minister Guy Opperman’s decision to remove the amendment last month has been heavily criticised in some quarters – but he was left with little option.
I do not say this because I don’t support the need for guidance and the benefits it could deliver to consumers, but because the Lords amendment was ill-thought-through and has not been shown to be workable on any practical level.
This is not about provider self-interest as one former pensions minister has decried. From a commercial position, AJ Bell would benefit from more people taking guidance and advice about their retirement options.
Our interest is in ensuring any initiative to improve take-up of guidance and advice works on a practical level.
The primary problem is the timing of ‘auto-guidance’. The House of Lords amendment created a non-defined requirement for providers to give access to guidance at the point individuals “require access” to the pension freedoms or wish to make a transfer.
This is precisely the wrong time to push savers into guidance. Someone who approaches a provider to access their fund will only typically do so because they have already decided how much they want to withdraw and that they want it as soon as possible.
Assuming those individuals would be given the chance to tick an ‘opt-out’ box, the majority of people will therefore inevitably tick the box to enable them to receive their money as soon as possible.
However, we know some may miss the opt-out box and be auto-enrolled into a guidance appointment – even if they don’t want it.
As a result the payment of their benefits would be delayed and thousands of savers would be understandably angry at their provider (and most likely their adviser – no distinction was made between advised and non-advised clients in the original clause, advised clients would be subject to it as well) as they will perceive them to be refusing to give them their own money.
There is even a risk that a delay in payment of benefits as a result of someone being auto-enrolled into guidance may have serious tax consequences.
Take the example of someone who approaches their provider shortly before the end of the tax year to receive benefits which take them up to a particular tax limit for that year – for example the personal allowance or the amount at which higher rate tax kicks in.
If payment is delayed because the provider has to wait until the individual has received guidance, there would be every chance the payment would fall into the following tax year, materially and detrimentally affecting the tax position of the beneficiary.
The Lords amendment therefore risks being ineffective, hugely unpopular and financially detrimental.
There has also been no debate about what the House of Lords amendment would actually mean in practice. Specifically:
- It fails to articulate what ‘guidance’ savers would be auto-enrolled into. Is it a telephone conversation? Face-to-face meeting? Online questionnaire? As it stands today, the earliest date upon which someone would be able to book a phone appointment using the Pension Wise online booking service is 16 March 2018.
- The legislation doesn’t impose an age limit but appears to apply to anyone transferring between defined contribution schemes or accessing benefits. If someone is aged 49, for example, and transferring with a view to accessing the freedoms in 6 years, the legislation would indicate they get an appointment. However they can’t because guidance is only available to those aged 50 and over.
- Is there a decency limit on the requirement? If someone has, for example, a £500k pot and they’re taking £5k lump sum for a one-off purpose with no intention of taking further benefits for years, does their provider have to book them an appointment?
- What happens when someone is making several transfers to several different providers? Do all of the transferring schemes have to automatically book an appointment?
- Why are annuities excluded from the Lords’ proposal? If anything, advice is even more crucial here given that the purchase of an annuity is an irreversible decision whereas someone accessing the freedoms still has the freedom to move to a different provider and/or change their income level at any point.
To effectively encourage more people to take guidance and advice, interventions need to happen much earlier in the retirement saving journey than the point when they request their money.
This should be informed by behavioural research to inform both how and when such interventions should be targeted, although reaching a landmark birthday (e.g. 40 or 50) would be a good place to start. Consultation with the industry on the practical requirement of any proposals is also essential.
As far as we are aware, the Lords’ amendment was devised in a short timescale with no consultation or research and the involvement of only a handful of people, none of whom have direct, day-to-day involvement with individuals looking to access the pension freedoms.
The Government amendment to the bill provides scope for consumer research and consultation to ensure greater access to guidance can be delivered at the right time and in the right way.
Gareth James is the head of technical resources at AJ Bell