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Face value

The stark realities behind the proposed £50m generic advice service.

In 2003, the BBC reported the findings of a Department for Education and Skills paper that said 21 per cent of adults in England had numeracy skills lower than the standards set in tests for 11-year-olds. This week, another BBC news report caught my attention. Headlined, Free financial advice, it was illustrated with a clip of a face-to-face meeting between a financial adviser and his client.

This looks like great news for advisers. At last, the Government has woken up to the true value of financial advice. The advice in question is generic and will cover personal accounts when they arrive in 2012 and mortgages.

Then you read the small print. The budget for this initiative is £50m a year. If eight million people join personal accounts, that amounts to a spend of about £6 a year each. Not exactly enough to buy a consultation with a qualified adviser, unless each person receives a free consultation once every 80 or so years. Average additional revenue for each adviser would be about £1,000 a year. Hmmm.

By illustrating its news item with a face-to-face meeting, the BBC business department has shown how little people – and very well educated people at that – understand numbers. In this case, the value of £50m and how far it will stretch. This sort of money might buy a website and a very limited telephone helpline. There is obviously a clear need to educate people about finance, even those we would regard as well educated.

The BBC report was referring to a review announced by the Treasury that will investigate the feasibility of setting up a national scheme to provide generic financial advice. Thankfully, this review is to be led by Otto Thoresen, chief executive of Aegon UK, someone who does understand the difference between the price of financial advice and the price of a fish supper.

Even if the amount set aside for this project is woefully inadequate, the idea is good. The average person does not have even a basic grasp of how pensions work. Our private pension system is probably the most complex in the world and our three-tier state system is impenetrable, even for pension anoraks.

The introduction of personal accounts adds new challenges. Many of the people being encouraged to save in this new state system have never before saved in a pension. They are the group most likely to qualify for the means-tested pension credit. They are also the least literate and numerate.

It looks likely that automatic enrolment will apply to all people who are not already in an exempt employer’s pension scheme. The Government recognises that many people will not benefit from saving in a personal account but there are no plans to exempt these vulnerable groups from automatic enrolment. Individuals will need to take the decision themselves.

The Pensions Policy Institute has done a lot of research in this area and its findings are worrying. For example, many people on average earnings or below who are likely to rent their home in retirement ought to avoid personal accounts, as should some older lower-earners with broken work records and some people who will not benefit from a full state pension. A lot of women fit into the latter category.

Otto does not have a lot of cash to play with. If this new advice service gets off the ground, he should target it at the most vulnerable – those for whom saving in a personal account does not pay. Or he could buy each personal account saver a bottle of wine or six-pack of beer to help them drown their sorrows.

John Lawson is head of pension policy at Standard Life.

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