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Unintended consequences: Are the Budget reforms beginning to crack?

Chancellor George Osborne’s Budget reforms could expose savers to a raft of new retirement risks unless policymakers address the underlying problem of consumer inertia, experts are warning.

Under intense pressure to tackle the perceived ills of the annuity market, the Government revealed proposals to hand savers unprecedented freedoms from next April, effectively ending the dominance of annuities. The Chancellor also pledged everyone aged 55 or over will receive “free, impartial, face-to-face guidance” about their retirement options.

While the reforms have been lauded by many as a political masterstroke, there are concerns savers have simply been given new cracks to fall through.

Experts warn the changes do nothing to address the problem of poor consumer engagement, meaning savers risk simply defaulting into a drawdown contract – as opposed to an annuity – without considering the risks associated with these products.

Furthermore, with providers looking to develop their own guidance offerings, will savers really receive impartial help to navigate the new landscape come April?

Regulatory gap

Members have the right to access the Government guidance – set to be led by The Pensions Advisory Service and the Money Advice Service – but this is not mandatory, meaning many could end up interacting solely with their provider.

Scottish Widows is developing a front-end guidance system to provide retirement help for those who do not want to pay for advice while Aegon says it will be beefing up its online service.

Fidelity Worldwide Investment retirement director Alan Higham predicts those who have been sleepwalking into default retirement products will continue to do so and are likely to ignore the offer of free guidance. “The disengaged will either stick with an annuity from an existing provider or take the whole pot as cash”, he says.

The FCA is consulting on the design of the guidance guarantee but Higham argues the regulator’s focus is too narrow and should also include providers.

“We need to get joined-up thinking so that the whole industry realises we are all providing guidance – the regulator has to make a decision about non-advised sales,” he says.

Just Retirement group external affairs and customer insight director Stephen Lowe agrees regulation of providers needs to be ramped up.

He says: “We have been suggesting there should be a second line of defence for those who opt out [of guidance].

“Any communication or guidance given by a pension provider needs much stricter regulation than before to ensure it puts the interests of clients ahead of the interests of
the company.”

Hargreaves Lansdown head of pensions research Tom McPhail says: “Providers need to be on notice that the FCA will be scrutinising these sales practices, that non-
advised sales will be called to account. There should be no inertia selling – people should have to engage and go through some kind of sales process that has an audit trail.”

Drawdown: The new default?

When the reforms kick in on 6 April, the barriers for entry into drawdown arrangements will be removed entirely. Rebranded as flexi-access drawdown, savers aged 55 and over will be able to take any amount over whatever period they want.

Pension providers and schemes are not obliged to offer the new flexibilities – a “major mistake”, according to Syndaxi Financial Planning director Robert Reid – but members are free to transfer to those that do.

Partnership head of product design Mark Stoppard says some people will be “so confused they will simply take what their existing provider offers”.

“Those who do not want to engage with the guidance process risk rolling over in default drawdown contracts that may not be suitable for them,” he adds.

Shadow pensions minister Gregg McClymont also raises concerns about large swathes of the population potentially buying drawdown products without properly considering the risks.

He says: “Many retirees are likely to display inertia in the face of complexity and purchase at-retirement products from the provider. Market characteristics are likely to display similar features to those which already prevail in the annuities market – with consumers facing a complex array of products many of which may offer poor value for money.”

Scottish Widows chief executive Toby Strauss previously told Money Marketing the insurer was working on updating its drawdown product as this would “effectively” become the default after April.

But Standard Life head of pensions strategy Jamie Jenkins says: “It would be bold of any company if it thinks it can default people into drawdown products. The only
default is doing nothing because you don’t have to take your benefits at any age.”

Default investment challenges

Default investment strategies have evolved around the principle that most people take advantage of the 25 per cent tax-free lump sum and use the rest of their pot to buy an annuity. 

This led to the development of lifestyling, where assets are gradually de-risked into cash and bonds as the member approaches retirement.

Does the sudden growth in options for savers mean a drastic rethink is on the way?

Jenkins thinks not. “A couple of things haven’t changed – the 25 per cent is unchanged, as is people’s need to de-risk generally as they get older,” he says.

“Within the remaining 75 per cent that was designed to hedge against movements in annuity rates, you still need to de-risk. A lot of the assets you would use to do that are the same as you would have used before.”

However, auto-enrolment provider The People’s Pension chair of trustees Steve Delo says all DC trustees are struggling with designing appropriate default funds.

For instance, for people aiming to go into drawdown, he says it might make more sense for them to remain 75 per cent invested in equities or diversified growth funds.

Jenkins says Standard Life is working on its proposition, hinting that absolute return funds – which aim to produce positive returns in all market conditions – could have a role to play.


Minesh Patel IFA, chartered financial planner, EA Financial Solutions


The reforms could cause great confusion – too much choice is not always so great. The wealthy seek out advisers, but it’s the people below who clearly aren’t going to want to seek advice. The Government needs to fund qualified financial advisers. At the moment advisers go for high net worth – it would be good to see Government subsiding advisers so they can serve people with smaller pots. 

Jason Witcombe, director, Evolve Financial Planning


The guidance guarantee doesn’t change a great deal. It would be lovely if we could just wave a magic wand and sort things out for us but that’s not how the world works – people have to take responsibility. I don’t think we should have something like the NHS of financial advice but perhaps there could be some kind of tax break to help pay for advice at the point of retirement. 



The biggest problem with the retirement income market was not lack of choice, it was lack  of engagement. Those who made sure they understood what they were buying made good choices and will continue to do so in the new era. Unfortunately, large numbers lost out because they accepted the offer from their own pension provider, trusting they would be offered a fair deal.

It is difficult to be optimistic that the new rules will solve the problems for this kind of retiree because the new rules are not tackling this lack of engagement. Many of the options they will be drawn to are likely to sound good but be far more complex, with higher costs, more investment risk and fewer guarantees.

The “guidance guarantee” is intended to stop these kinds of poor decisions but will it actually work? Members do not have to take the guidance and it is likely many will not want to pay for additional regulated advice. Providers are developing their own versions of guidance, so will savers end up being influenced by the very people the guarantee ideas is designed to sidestep?

Guaranteed guidance could work if it turns retirees into engaged consumers, encouraging them to ask more questions, consider a range of options and to seek out the right professional help. 

The weakness is no one will be forced to go through guidance or to take any notice even if they do, which is why we have been suggesting there should be a second line of defence for those who opt out. 

Our view is any communication or guidance provided by a pension provider needs much stricter regulation than before to ensure it puts the interests of clients ahead of the interests of the company.

We are optimistic that guaranteed guidance will make many more people realise the importance of personal advice and financial planning in retirement and are strong supporters of adviser directories that enable people to take the next step. 

Executed properly, this should help avoid inertia which so often leads to people receiving a poor value deal from their existing provider.

Stephen Lowe is group external affairs and customer insight director at Just Retirement


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There are 12 comments at the moment, we would love to hear your opinion too.

  1. Guidance should be provided in a prescribed form (as per the FCA consultation paper) by pension plan providers.

    Consumers should then be left to decide if they need/want advice and engage with IFAs accordingly.

    This would save tens of millions of pounds of money (much of it belonging to IFA firms) about to be wasted on the guidance service providers.

    Don’t hold your breath though it would sound too much like a U-Turn and Politicians don’t like those do they?

  2. Any client who rolls over into a retirement income product with their existing provider should be obliged to take up the guidance guarantee. This will ensure they will get impartial information, rather than just relying on information from their existing provider.

  3. Yet all that really needed to be done was to set the MIR for Flexible Drawdown at an appropriate level (such as state pension, or state pension plus X). Most of the perceived problems would not have arisen and most of the (again perceived) objectives for pensioners would have been met. (Granted that measures would have been needed to extend flexibility to occupational schemes or legacy schemes).

  4. All this fear of tax loss!, what was the Mr. Osborne expecting? The the legislation was developed to create Tax revenue, two sides of the same coin Ii would suggest.

    The issue here is the artificial use of the system to replace income with pension extraction, and not as intended offer incentives to build a pension fund. What will happen if we are not careful, is the loss of momentum to funding the legislation provides.

    The scenarios I set out, are based on experience and real life cases.

    There are many prudent pension savers who use their pension funds to settle all manner of capital requirements, such as mortgage repayments, education costs, and sometimes to fund capital needs within their businesses. Continued pension funding in such cases, is not driven by a desire to create a tax avoidance devices, but a legitimate use the tax advantages of pension to accelerate funding, creating a larger fund to cushion themselves against their unknown needs in later life. There is a significant difference! And whilst the squeezing of tax avoidance schemes is high on the to do list for Govt. They ought to give the proper pension savers, the benefit of the doubt for a years or so.

    Unfortunately the funding proposals do not differentiate between the prudent saver and the tax avoider, and this can’t be right in our “fair world”. And whilst the flexibility is welcomed, the methodology of managing the “tax leakage” identified is flawed.

    Yes it is clear the fund exhaustion proposals provided the opportunity to manage the tax take on income of £50,000 to 12% or less, I like many, had worked that out within seconds of the Chancellors words being spoken. And it is without doubt that some would have taken advantage. Unfortunately, the proposed solution to the problem as it has been presented, is not a fair fix as my example below evidences.

    Scenario 1
    Tax payer who has enjoyed the safety of pension accumulation within a defined benefit scheme.
    Leaves employment in tax year 2015 /16 tax year, takes the TFC and triggers his defined benefit pension. This individual retains the £40k annual allowance.

    Scenario 2
    Prudent tax payer, accumulates pension in a DC scheme. Earlier planning had set in place a need to crystallise his TFC in 2015 /16 tax year, could be to fund his business, education fees pay off mortgage etc. Also triggers his DC pension within the GAD limits. At the end of the business year, has sufficient profits to top up pension for later life, restricted to the new £10k funding level.
    To bring consistency back to the funding rules, avoid the differentiations and recognise that many over 55s use pension to accumulate funds for later life and not as a tax avoidance device, requires the funding limit trigger to be based on GAD limits.

    Stick within the GAD multiple limitation and the taxpayer retains the £40 annual allowance. Breach it and the allowance falls to £10k.

    This approach would also facilitate the opportunity of dropping the funding level to £0.00 pa, for anyone who funds and then totally crystalizes more than three times in say a 5 year period

    Or am I missing something!

    Your thoughts.

  5. Claire Trott - Talbot & Muir 5th September 2014 at 10:34 am

    Investors who are currently being defaulted into annuities suddenly being defaulted into drawdown will surely be the next mis-selling scandal, without the sell. Providers really need to avoid any default options forcing clients to at least make a decision or receive nothing. As mentioned above there is no time limit for providers to force clients into an income producing product, assuming they have updated their scheme rules accordingly – that is another issue entirely.

    Although this won’t necessarily engage consumers fully it will encourage people to seek advice or at least guidance. There is more to retirement planning than just pension funds and how much tax free cash they can get their hands on.

  6. Crack? They were crackers in the first place.

    So Boy George stands up and tells us how responsible everyone is and how they should be allowed to dispose of their pension pots as they see fit. (Of course nothing to do with an accelerated tax trawl!)
    In the next breath Georgie and his mates decide that people are not to be trusted to save so they make pensions compulsory.

    So we now have Mr Bloggs reaching retirement with a larger than (hitherto) average fund of (say) £50k. He takes his £12.5k PCLS and then draws down £20k in year one and the remaining £17.5k in year two and remains (even with his State Pension) a BRT payer. HMRC receive £7,500 in tax over the two years instead of around £450 odd per year. (That’s accelerated the trawl from 16 years to two).
    Mr Blogs goes on benefits in year 3. And this is economics?

  7. @Claire Trott
    I agree. Providers selecting a default option for retirees will always have the devil of profit on their shoulder which can always lead to claims of at worst miss-selling or at best that the best interests of clients weren’t considered.

    The only default option should be doing nothing. If a client doesn’t respond to suggestions that they seek guidance or advice then they should have to sign a disclaimer explaining that they know what they are doing and have made their own choice as to which route they are taking. Surely that would make them stop and think before putting pen to paper.

  8. Another example of a policy rushed through for short term electoral gain (watch to see how the tax revenues get divvied up in the pre-election budget) with future generations left to pick up the pieces.

    A bit like the right to buy….

  9. I don’t know what every-one is getting in a hissy fit over ?

    It will happen and it will be done ! and the huge cost will be borne (as stated by Osbourne) by an industry levy !!!

    Oh happy days, our clients pay for advice / guidance, in turn we have to pay for others to get it free ?

    Now what on earth is wrong with that ?

    The least of anyone’s worry’s is what people do with there fund, for all I care they can buy a artic load of jelly babies !

  10. It is interesting that the ‘A’ in MAS and TPAS both stand for ADVICE, when in reality neither are FCA authorised to give advice.

    What hope for the poor beleigured client who will certainly struggle to understand the difference between Guidance and Advice?

  11. If the guidance looks like advice and sounds like advice the consumer will likely think they have been given advice. Just wait until the complaints start coming in. The press will love this and it will make massive headlines. “Government quangos lead me to financial ruin” “The Government set up MAS and I acted upon what they said. I now find out I have little or no pension left” “FCA responsible for the disappearance of hundreds of million of pounds in pension funds”. I will laugh my big fat ass off at them crawling away from responsibility when it happens and it WILL happen

  12. Call me a cynic (I don’t care), but since NEST was first conceived, I failed then, and am still failing to find any initial which relates to ‘pension’ or ‘ retirement’. NEST – National Employment Savings Trust – with emphasis on SAVINGS. I can’t help but feel that what we are witnessing now is the result of a carefully designed, and secret mandate to do away with annuities in the near future, and replaces pensions with what is effectively an instant access deposit account (tax liabilities accepted).

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