A recent survey conducted by the housing and care provider Anchor established that the perfect retirement for many of us would involve retiring at 63 with no mortgage and enough money to take two holidays a year. We’re not going to argue with the results but will the proposed “guidance guarantee”announced in the budget earlier this year help or hinder these aspirations?
The dust is yet to settle on the headline grabbing news from the 2014 Budget. From April 2015 the requirement to buy annuities with our defined contribution pension pots will be swept away and we will be able to take our pension as a lump sum from age 55 (subject to tax). The pensions landscape for many of us will be reconstructed. This is great news, isn’t it?
The safeguards to support individuals in this new world will be key to the success or failure of these new freedoms. The Government has promised to provide those affected with a guidance guarantee. The guarantee is designed to give people access to good quality, free and impartial advice at the point of retirement.
Sounds good in principle, but how will it be implemented?
The Government will put flesh on the bones following the consideration of responses to its consultation entitled “Freedom and choice in pensions”, which recently closed. The pensions industry is taking the guidance guarantee issue seriously. There has been a glut of publications, papers and communications in response to the consultation, issued by various interested parties including the National Association of Pension Funds, Association of British Insurers and the International Longevity Centre, as well as by insurance companies such as MetLife and Prudential.
So what do the responses to the consultation reveal?
Fascinating facts, thought provoking ideas and the results of a number of surveys centred around the people who will be affected by the guidance guarantee:
- Approximately one million people aged between 55-64 are likely to be affected by the changes. This figure excludes those who are currently able to take advantage of existing pensions flexibility. The figure could be bigger if the Government continues to allow members with defined benefit pensions to transfer their benefits to defined contribution schemes
- In 2012 only 18% of the UK adult population engaged with an independent financial adviser and those who did so tended to have larger pension pots (on average those with pots of £74,554 took advice, compared to those with pots of £37,277 who did not )
- One in eight people believe the Bank of England base rate is above 10%. One in seven people under 35 think it is better to pay into a pension in their 50’s rather than in their 20’s
- Men and women aged between 50-60 tend to underestimate how long they will live by between 2 and 4 years respectively
- Annuity take up is generally lower in countries such as Australia and America where there is more freedom in how pension savings may be accessed. However, Swiss people invest around 80% of their defined contribution pension assets into annuities despite having unlimited access to their private pension savings. This is put down to the availability of generous annuities and to a national underlying trait of financial conservatism.
The responses show a lack of awareness of issues which affect individual pension choices. We suggest that more individual advice will be required than the Government is anticipating. Failure to properly address industry and member concerns could give further encouragement to pensions organisations involved in pensions liberation scams.
The Government has set aside around £20 million to support the implementation of the guidance guarantee. Based on initial feedback from the pensions industry, it is clear that the Government has underestimated the magnitude (and cost) of the challenge it will face in fewer than nine months’ time.
So is the idea of the perfect retirement any closer? Well we can all dream….
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