I wonder what goes through a politician’s mind when he makes a big policy announcement? When the Chancellor announced “the end of annuities” in March last year, I seriously doubt he had thought through the full ramifications of pensions freedom and choice. It was, let’s face it, a bit of a vote grabber.
His big message, however, was that we trust people with their pension pots. They have been prudent in building their retirement funds, so they will be prudent in spending them. And then he lost his nerve. As much as we trust them, they might need “advice”.
Indeed, what about those people who are members of defined benefit schemes or have a guaranteed annuity rate included in their pension pots? What if they go for freedom and choice and then later, having exhausted their pension pot, realise they gave up a lifetime of income?
Better make sure they do not come back and complain to us. Let’s introduce not just a guidance guarantee but also insist that these “safeguarded benefits” owners take advice. That way, we will have someone else to blame.
Readers with a long memory (well, actually, not that long) will remember the pensions misselling scandal of the 1980s: people being transferred out of DB schemes into money purchase pots and then having to be compensated when it was determined they would have been better off staying where they were. After the event, the regulator introduced some much tighter rules and guidance around advice in this area.
One of the positives was that the adviser was required to produce, deliver and explain a transfer value analysis report to the client ahead of any action. Included within that reporting was the critical yield calculation.
Have you looked at these lately? Leaving aside the fact these reports are based on a whole raft of prescribed assumptions that may or may not happen in practice, the critical yield is still annuity based. I understand that some time later this year the FCA may consult on the subject of the transfer value analysis. But should that not have been done and dusted by now?
Evidence seems to suggest advisers are experiencing a high enquiry rate by DB scheme members: some wanting advice and others looking for a “rubber stamping” service. Freedom and choice is a popular option. Combined with the changes to pension pot death benefits, many DB owners are being encouraged to consider the alternatives. They are, of course, then required to seek advice.
If we really trust people to make good decisions with their pension pots should they really be compelled to pay for advice if they do not want to? And if they are required to do so, is it right we are making up the rules and guidance for advisers on the hoof?
Surely the politicians who introduced these changes must have thought about all the ramifications before they did so? Or perhaps I just expect more from them than they are actually capable of.
Nick Bamford is executive director at Informed Choice