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Two thirds of DC schemes say guidance guarantee insufficient

Almost two thirds of pension schemes think the Government’s guidance guarantee will not provide savers with enough support, according to a survey by Mercer.

In March’s Budget, Chancellor George Osborne announced that savers would be able to take their entire pension pot as cash once they reach 55. Alongside this he pledged that everyone would received “free, impartial, face-to-face” guidance once they reach retirement.

The FCA’s consultation on how the guarantee will work said there will be “no limits” to the number of times savers will be able to access the service once they reach retirement.

A survey of 300 employers and trustees by Mercer found that 62 per cent plan to go further than the requirement to facilitate access to the guarantee and will offer additional support to savers.

Mercer UK defined contribution savings and product leader Roger Breeden says: “Receiving generic guidance provided shortly before retirement will be useful, however, for most DC savers it will be too late. To increase their chances of getting a decent pension individuals need to make their investment and contribution choices at a much earlier stage.”

The Government also plans to mandate regulated advice for those seeking to transfer out of a defined benefit pension scheme.

Just over three quarters of respondents to the survey said they expect less than 20 per cent of DB members to transfer out, while just 16 per cent expected more than 40 per cent to leave.

Breeden says: “Such transfers, especially in great numbers, could have an impact on asset liquidity, administration processes and the employer covenant, so regular monitoring and building it into risk management programmes is essential.”


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There are 2 comments at the moment, we would love to hear your opinion too.

  1. How best to deploy one’s pension fund/s at retirement is a different and separate issue from how to accumulate adequate funds in the first place and, IMHO, trying to combine advice on both is not a good idea.

    The government should embark on a major campaign to educate people to start saving sooner rather than later which, to a limited extent, AE will achieve. For those now approaching retirement, the clock cannot be wound back and the only practical strategy is to help them make the best of what they’ve got.

    It would have helped if, instead of totally discarding all limits on pension fund access, the government had stipulated a limit of, say, 7½% p.a. so at least some sort of framework within which to work remained. Because the government didn’t do this, advising people on how best to deploy their pension funds became overnight hugely more difficult.

  2. How many times do we hear the statement “pensions aren’t doing very well are they”? A fall back justification for someone to defer for yet another year or two the decision to fund for their retirement years. The budgetary changes however provide the opportunity to reposition that mind-set.

    The reality is that we now accumulate what might better be described as a “deferred income fund” rather than a pension. That fund can be eroded over a period of time and at the lower end that extraction might possibly be tax free in its entirety. This is what the lower level fund owners need to understand. Not grab the pot and run as many unfortunately will!

    Consider a fund of say £40,000. Assume the member might only have the basic state pension, leaving around £3000 pa gap of untaxable income. Add in a 3% fund return and the de-cumulation could last around 20 years.

    The outcome would be to deliver the best part of a 40% increase in their pension income. How many political parties would like to commit to such an increase in the basic state pension in their manifestos?

    Historically annuity purchase or draw-down would have required fund of around £60-£80,000 to deliver the same income, 2-3 times the size of the average pot.

    Experience tells me to some degree part of the pension problem is that most people out there assume financial advice is free – moreover, they do not see either the need to pay for advice nor the need to fund for their retirement income needs either. And until such time as those with those views wake up to the understanding; that for every year of work, there is a need to set aside for the retirement years things will never change.

    It may be hard to stomach, but the reality is we all need to accept our later life needs are not the responsibility of the state or other tax payers.

    The guidance issue is in my view simply plastering over the cracks when the real need is for advice – and advice will have to be paid for.

    David Thompson.

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