Shortly after Chancellor George Osborne announced in his Budget speech that workers would no longer have to buy an annuity when they retire, one website I visit regularly published a list of 10 ‘hidden consequences’ of the pension reforms.
Topping the list was the potential for pensioners to blow their new-found wealth on holidays or fast cars, an intriguing take on the mentality of older people, many of whom are likely to have spent decades carefully salting away money for their retirement.
Maybe it really is possible that, overnight, people’s way of thinking can change so radically. One minute you are slaving away in an office, shop or factory, saving for your retirement; the next you are blowing your dosh on fripperies.
The reality, of course, is that most retirees are well aware how financially difficult their lives will be when they stop work. They will not be splashing out on Lamborghinis. If anything, they are more likely to deprive themselves so that they can leave a little pot of cash to their loved ones when they pass away.
In fairness, way down the list the same article also discussed another potential hidden consequence: that of pension providers which “will try to encourage you to use [your pot] to buy one of their products when you reach retirement”.
Luckily, “the Government is also making it a requirement that retirees receive some guidance from their pension company but it is not clear whether this will be impartial or free”. Barely three months in and it is becoming increasingly clear that the Treasury is looking to insurance companies to provide that supposedly impartial advice.
Last week’s issue of Money Marketing reported that it looks more and more as if the Treasury is moving towards accepting the dominant view within the ABI: that such a service can be safely delivered by the insurance industry.
If so, I think this would be a dreadful mistake. For if there really is a major unintended consequence of the 2014 Budget, it is the fact that hundreds of thousands of people retiring every year will need proper financial advice to help shape their decisions about what to do with their pension lump sums.
And I really do mean advice. Whereas up to now the key debate about post-retirement planning was essentially a regulatory one – how to ‘encourage’ the industry to persuade would-be annuitants to shop around for the best deal – the ante was most definitely upped on 19 March.
The opening-up of pension choices has completely changed the potential to make both far better, and worse, decisions about retirement lump sums.
But to imagine that an industry consistently incapable of reforming its exorbitant 1980s and 1990s pensions charging structures, or genuinely delivering OMO advice, can suddenly discover a reservoir of impartiality deep within its recesses means flying in the face of all experience over the past 30 years. The advice needs to be genuinely unbiased and must be seen to be so.
Moreover, to pretend that half an hour’s ‘guidance’, or a website which takes you through a generic decision tree, is enough to satisfy retirees’ needs is not a tenable argument.
No, it has to be genuine and actionable advice based on a review of that individual’s personal circumstances. And the potential outcomes have to be explained clearly and in writing.
Not every retiree will want, or need, such an in-depth service. For some, a website may be fine. But they should all be offered the same option, perhaps with a ‘free voucher’ entitling them to a set number of hours of an adviser’s time.
While on the subject, that the Money Advice Service can deliver anything approaching the level of advice needed to ex- or would-be annuitants, as ministers and other senior figures in the industry are implying, is a farce. The MAS’s work on the ‘advice’ side of its operations is currently under review because it was judged not to deliver value for money by the National Audit Office report in December 2013.
Contrary to the MAS’s jaunty claim in a press release last week welcoming the appointment of Christine Farnish to review its operations, the NAO found levels of genuine engagement by users of the MAS website to be appallingly low.
Not that I am hopeful of anything better from Farnish, a perennial quangocrat whose experience of the private sector included providing Barclays with consumerist window dressing for a few years – a bank which later got caught up in the late-Noughties bank overdrafts scandal.
Advice means advisers
Let’s go back to basics: around 300,000 to 400,000 people will need genuine financial advice every year. Advisers must be centrally involved in providing that service, perhaps through a standalone body funded by a joint industry and Government levy, managed by Citizens’ Advice, which is far more trusted by consumers than the MAS has ever been. The benefits of expert, unbiased advice at retirement age are huge. Opting instead for a combined MAS- and industry-led service is a dangerous fudge born out of short-term expediency – but with the potential to leave many pensioners worse off in their retirement.
It could all end in tears if we let it.
Nic Cicutti can be contacted at firstname.lastname@example.org Follow him on twitter @NicCicutti