I have spent years helping companies comply with stakeholder rules and have persuaded them to offer excellent pension schemes with reasonable employer contributions. Without auto-enrolment, employees would not get round to completing the complex application forms or would respond that there was little point in joining the employer’s group personal pension as they would be leaving the company soon for a better position.
I can recite the names of these ambitious people who are still with the same employer and still not benefiting from the employer’s contributions. Auto-enrolment on all employer pension schemes with a positive opt-out facility will be one of the best things to happen to UK pensions.
As we look forward to thousands and thousands of people being automatically enrolled in pension schemes, we should ensure that once people are automatically made to join, we treat the accrued pension funds at retirement in a manner that also treats the client fairly.
Let me tell you a story. My uncle is a clever chap and recently announced that he will be retiring on two-thirds final salary. He never felt he had to take advice on his pension funding as he knew he was lucky to have a pension fund this large. When we went on to discuss how he will remain a higher-rate taxpayer due to his pension income level, he was shocked, as nobody ever told him that he will lose a big chunk of his pension to 40 per cent tax. When I asked him how he was to draw his pension, he looked at me as if I were mad. “From the pension scheme provider, of course,” he replied.
The open market option is high on the FSA’s radar under the TCF remit. Annuity providers have until December to improve how they communicate with clients about how they take their pension income. UK life expectancy has reached its highest level and men aged 65 can expect to reach 81 while women aged 65 can expect to be with us until they are 84.
It will be a start to a better future if pension offices are open and honest about encouraging clients to go elsewhere to secure their retirement income. Due to changing socio-economic factors, there is no doubt that there is an increased demand for a new breed of retirement-focused products. Enhanced, impaired and specialist annuities are all seeing increased demand as better rates are sought for clients. As we get access to more specialist and flexible alternatives, this is where whole of market independent financial advice is invaluable.
I will leave you with a final thought. Surely, if we have auto-enrolment in company pension schemes when employees start work, we should have an automatic open market option facility at the end of a person’s working life?