A big challenge for members of Nest is going to be how to get the most from the fund that they accumulate at retirement although for many, building up that fund may be challenge enough.
The answer from Nest was published towards the end of June when it announced a panel of five annuity providers from which members can select. This includes two providers that will offer only impaired life and/or lifestyle rates.
It is not entirely clear how the panel was arrived at although the financial security of the providers, the likelihood that they will remain competitive and the condition that they accept purchase prices as low as £1,500 were undoubtedly all considerations. It may also be that the panel is added to or amended over time although the aim will probably be to keep the choice as simple but competitive as possible.
While Nest may provide a means for annuity purchase for the many retirees who will have accumulated funds under the new arrangement, the choice may still be confusing despite the constricted panel. Couple this with the range of providers and options available in the open market and it is clear that there needs to be a commitment to guidance and education for individuals to be able to make the most appropriate decision.
Perhaps more worryingly, there may well be individuals who have bigger accumulated funds and/or other funds or sources of pension income that they can call upon. Focusing on the Nest fund alone fails to put that into context with the rest of the individual’s pension savings.
For these individuals, the range of options for providing income in retirement is growing in complexity and decisions about levels and design of income can become crucial. Making the wrong choice is arguably likely to create serious issues over a potentially long retirement period.
The potential unintended consequence of the panel approach is that, just at the point individuals need to secure the best possible rate and income shape, they could be guided down a decision path, unaware that there is a more appropriate whole of market solution available to them.
The Government’s drive to promote a culture of financial awareness and saving for retirement is commendable and Nest is an important step in that process. However, much more work needs to be done to educate those approaching retirement as to how best to allocate and benefit from what for the most part will be finite accumulated funds.
This means looking at their overall financial circumstances, whether that is in the period during which they are saving or at the point when they are securing their pension income.
The education process needs to underline the importance of having independent advice.
Mark Pearson is director of business development at Origen Financial Services