The headline-grabbing Budget proposal to remove the restrictions on money purchase pension fund drawdown from 6 April 2015 came with a necessary corollary, namely the proposal that there would be a right to financial guidance on retirement choices at retirement.
Chancellor George Osborne’s speech referred to his inherent trust in people doing the right thing with their pension funds. Many have expressed the fear that funds could be quickly spent (generating a welcome income tax spike and possibly a PPI-like VAT haul), with the spenders then “falling back on the state”.
We have been reminded that it is estimated that around 80 per cent of the retirement-age population will qualify for the single-tier state pension set above means-test level, so the risk to the Government of needing to pay out any more to those with no private pension funds will be relatively low. Of course, there will still be those who withdraw their funds and spend them before state retirement age and have no other income. Evidence from Australia, though, seems to suggest that this risk is nowhere near as pronounced as some may fear.
In relation to the proposal to deliver a “right to financial guidance”, it is worth first understanding what has been stated on this in the consultation document, Freedom And Choice In Pensions, issued on Budget day.
Extracts from sections 4.9 to 4.15:
4.9: The FCA’s thematic review concluded that the annuities market is not working properly for consumers. It found that consumers miss out on benefits available from shopping around and switching due to their lack of engagement in pensions and annuities. Consumers find the trade-offs they face confusing and the impact of inertia means that people often fail to make choices which would get them the most value out of their pension savings.
4.10 The Government welcomes the recent statement by the Association of British Insurers committing pension providers to provide, at the point of retirement, “a conversation for customers with their pension provider or an impartial advice or guidance service about their retirement options”.
4.11 However, the Government wants to ensure consumers receive good quality guidance that meets their needs and stimulates active and informed choices. It is important that consumers know that the advice they receive is focused on their best interests and not those of the provider. That is why, as part of the new system, and building on the ABI commitment, the Government proposes to introduce a new guarantee that all individuals with a defined contribution pension in the UK approaching retirement will be offered guidance at the point of retirement that:
- Is impartial and of consistently good quality
- Covers the individual’s range of options to help them make sound decisions and equip them to take action, whether that is seeking further advice or purchasing a product
- Is free to the consumer
- Is offered face to face.
4.12 To deliver this, the Government will introduce a new duty that, from April 2015, pension providers and trust-based schemes must offer to each of their defined contribution customers a “guidance guarantee” at the point of retirement.
4.13 In order to ensure that this guidance really is impartial and high quality, providers and trust-based schemes will be required to ensure that the guidance follows a set of robust standards. These standards will be designed to ensure that guidance focuses on helping consumers understand the choices open to them, how to engage with products and providers confidently and knowledgeably, and how to access professional independent financial advice where it is appropriate for them to do so.
Working in partnership
The Government will ask the FCA to coordinate the development of these standards and the framework for monitoring compliance. In developing these standards, the FCA will work in partnership with consumer groups, the Pensions Advisory Service and the Money Advice Service.
The guidance will be developed using insights from behavioural economics as well as the expertise of consumer groups to ensure it promotes better understanding and active choice.
4.15 The Government wants to ensure consumers can be confident in the impartiality of the guidance they receive and would like to hear respondents’ views on the extent to which this guidance can be delivered by providers themselves without compromising impartiality. On the one hand, robust standards and monitoring should help to mitigate the risks. On the other hand, “in house” guidance may not be perceived as genuinely impartial, meaning that, to be successful, guid-ance needs to be provided by a third party that is independent on the provider. More (the conclusion no less) next week.
Tony Wickenden is joint managing director of Technical Connection
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