18th September 2013
Adviser group Hargreaves Lansdown is calling on the Department for Work and Pensions, the Treasury, the Financial Conduct Authority and the pensions industry to improve process of transferring of retirement savings into an income writes Philip Scott.
The Bristol based firm is writing to the Treasury, DWP and FCA, as well as the Association of British Insurers and the National Association of Pension Funds to propose a fundamental review of the at-retirement system.
Tom McPhail, head of pensions research at Hargreaves Lansdown says: “We need to reset the policy agenda because the at-retirement processes are not working. Only a minority of investors are shopping around effectively but many more are being let down by a system which needs a thorough overhaul.”
Hargreaves Lansdown has identified what it sees as five key measures necessary to improve the process.
Start retirement process earlier
The group believes that the at-retirement process should not be left until the last 6 months before retirement. “Wake-up packs and the at-retirement decision making should be started at least five years before retirement, not least because the way that investors plan to draw on their retirement savings should have a direct impact on their pre-retirement investment strategy. This is something for the FCA to take up as the pre-retirement process is governed by their conduct of business rules,” says McPhail.
Improve investor engagement
While investors need to be engaged with their retirement savings, McPhail believes that ideally this should start from the day they join a pension. He believes it is unrealistic, uneconomic and unnecessary to expect them to take expensive regulated advice. He says: “Most investors are quite capable of managing their own money, if given a modicum of support, and simple systems on which to administer their savings. There is no one-size-fits-all solution to retirement saving; the only solution that works is individual responsibility and engagement. It is up to policy makers and the pensions industry to help investors manage their responsibilities effectively.”
Make shopping around the default
The starting point for all investors should be that they shop around for a retirement income solution. Last month the spotlight was thrown on the gap between the best and worst pension provider annuity rates as insurance firms now have to disclose deals on the website of their collective trade body, the ABI. With the so-called the Annuity Window, the ABI, is forcing its member life insurance companies to publish in the public domain how much they pay out in annuities – what a saver receives in exchange for a pension pot.
Over 400,000 people buy an annuity each year, and getting the right deal can mean thousands of pounds more income during retirement. The introduction of this annuity tool, further highlights to pension savers they must shop around, or use the so-called ‘Open-Market Option’ when looking to exchange their nest-egg, as there can be a significant gulf between the best and worst rates.
McPhail says: “Unfortunately at present, for too many people, the default option is still to look at their existing insurance company’s annuity terms, with shopping around being presented as an after-thought. This is the wrong way round and only by making shopping around the default can we hope to engage investors in wider solutions beyond simply turning all their pension pot into a single life level annuity in one go.”
Reform Trivial Commutation rules
McPhail says: “It is in no one’s interests for investors to have to buy an annuity with a pot of only a few thousand pounds. If it were easier to take small pots as a lump sum then investors could get more control of their savings, the Treasury could get its slice of tax sooner and the pensions industry would be able to deal more efficiently with the remaining larger pension pots.”
Simplify lifetime allowance (LTA)
It has been seven years since pension simplification arrived in the UK and already there is a myriad of layers of lifetime allowance protection says McPhail, who adds that if the Liberal Democrats want to reduce the LTA to £1m, then there willll be even more. He says: “The Treasury’s policy of progressively restricting the permitted level of tax-free pension savings is stifling the savings culture and adding to the world’s over-supply of bureaucracy.”