21st July 2014
The government has pledged to provide free and impartial guidance to millions of pension savers when they are granted full access to their nest-eggs from next year.
The move follows the Chancellor of the Exchequer George Osborne’s announcement in his Budget speech earlier this year that from 2015 savers would no longer have to trade in their pot for an annuity, and instead will be able to access them as they see fit, at age 55.
According to Osborne, some 18m people will benefit from the changes, should they wish to take advantage of them.
There have been wide concerns that pension providers would take the lead in advice terms and that under such circumstances, savers may end up in unsuitable investment products.
However the advice will be offered through a broad range of channels via independent bodies such as The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS).
To date people in so-called defined contribution (DC) pension schemes – the fortunes of which are pegged to stockmarket returns have had to buy an annuity – which provides a guaranteed income for life. Annuities however have been highly criticised in the past for offering bad value.
The government said that the changes have been overwhelmingly well received, “with individuals supporting greater freedom and choice, and the pensions and insurance industry ready for the challenge of creating new, flexible products, which better suit individuals’ needs”.
In a statement, the government confirmed today:
Osborne said: “It’s right to support hard working people that have taken the long-term decision to save for their future and I’m pleased that the responses we had to our proposals on making pensions more flexible have been overwhelmingly positive.
“We’re making sure that people have the right support to make their own choice about how best to finance their retirement and I’m pleased to confirm that everyone with defined contribution pension savings reaching pension age will get free and impartial guidance on their range of available choices at retirement.”
The City regulator, the Financial Conduct Authority (FCA) has also today published a paper consulting on the elements of the guidance guarantee for which it will be responsible, such as setting and monitoring the standards with which advice providers will have to comply.
Two new safeguards are being introduced to protect both individuals and pension schemes in relation to defined benefit, better known as final salary schemes, to defined contribution transfers. These include a new requirement for an individual to take advice from an impartial financial adviser regulated by the FCA before a transfer can be accepted and new guidance for trustees on the use of their existing powers to delay transfer payments and take account of scheme funding levels when deciding on transfer values.
Tom McPhail, head of pensions research at broker Hargreaves Lansdown believes the decision to offer advice through organisations such as MAS and TPAS rather than pension providers is a sensible move but is concerned whether these services will have sufficient capacity to deliver the guidance.
He added: “The Treasury is opening the door for further product design: more flexible annuities which allow longer guarantees and one-off payments; and other complex products with intricate guarantees. It will become increasingly difficult for ordinary investors to discern whether they are actually getting a good product or not. In many cases it will be unsophisticated investors with relatively small pots of perhaps only a few thousand or tens of thousands of pounds. The Guidance guarantee will not help them here as it will not provide specific product advice, and paying for an independent financial adviser may be too expensive to justify.
“There will therefore be a huge job for the FCA to do in policing these new products, and the sales processes around them, to ensure that investors are sold competitively priced and appropriate products. Without this regulatory scrutiny, these pension freedoms could be nothing more than a mis-selling charter.”