1st December 2014
As the new pensions “freedom” era looms, more than half of over-40s have no idea whether they will be eligible for the pensions guidance guarantee. It’s just over four months to go until new retirement rules kick in, and fewer than one in three said they knew they could use the advice scheme.
The figures come from a survey paid for by Partnership, the annuity provider specialising in impaired lives – people with illnesses or who smoke or who otherwise face shorter than average lifespans. Partnership is a big loser from the new rules which remove the annuity as the default requirement. Its share price has fallen from 515p shortly after its June 2013 flotation and 345p before this year’s budget to a current 109p.
Free independent guaranteed guidance on pensions choices facing those about to retire is an essential cornerstone of the government’s reform package to ensure that guidance is trusted by consumers. The vast majority, including most of the financial services industry which showed an interest said that consumers would not trust guidance given by a person or organisation with a vested interest in selling a financial product or service.
The Partnership numbers show 53% of over-40s don’t know if they are eligible for the guidance guarantee. In addition, 18% said they were not eligible and only 29% said they knew they could use the service.
Controversial scheme full of unknowns
But the guidance guarantee is controversial. There is still no firm template for providing the service, and scant publicity, while IFAs complain that due to costs and the way it has been set up, many consumers will only receive generic advice online or by phone when they need personalised, individual help.
The Money Advice Service, itself a hate figure among many IFAs, was intended to provide some of the help. It has now been dropped in favour of Citizens Advice although the Pensions Advisory Service will continue in its planned role.
“Rather than a rejection of the guidance concept”, Partnership claims that the statistics appear to be due to a lack of education as 41% said ‘they did not know where they would go for ‘guidance or information’ with regards to pension planning.
It continued: “One in five (21%) said they would look to their pension provider which is a natural reaction but one which may mean that due to inertia they don’t look at all their options and do not receive the most appropriate product for their situation. Others (17%) would ask their family and friends for help. Another group would (18%) saying they will speak to a financial adviser and a further 18% looking to online resources for help. Only one in twenty said they would look to the Guidance Guarantee service for assistance.
Andrew Megson, Managing Director of Retirement, Partnership said,
“Only 23% of people knew that they could use the guidance guarantee service which suggests that there is a huge need for education around the new pension regime. Much of the discussion has focused on the new freedoms but ultimately these are not going to be properly taken up if people don’t fully understand their rights and responsibilities under the new system.”
He added: “Some people will naturally speak to their financial adviser and get the benefit of specialist advice but we are concerned about those who may have modest pension pots and little margin for error. It is vital that as the industry seeks to develop products, the Government ensures people understand that they are eligible for free impartial guidance which will help them to make the most of their retirement finances.”
Partnership must hope that many retiring decide on an annuity, especially if they are in ill health, as a guaranteed alternative to a plan it your self pension. But for this to succeed, annuity providers have to offer better value to consumers than the current products with their high margins for providers and advisers.
High risks of poor decisions
A recent study from the Pensions Policy Institute found “four in 10 retirees facing significant risks around how they access their pension savings unless they engage with guidance and advice services or have robust defaults in place”.
Segments of the population who are likely to require greater support because they will be more reliant on their pension pot savings to supplement their state pension and secure an adequate income throughout their retirement, are those with riskier portfolios, lower levels of financial capability and numeracy to make decisions, and pension pot sizes that mean they may not be actively targeted by the advice industry.
The institute believes around 12% will be at “high-risk” of making poor decisions when they reach state pension age if they are not offered support through either guidance and advice or suitable defaults. These are groups with a significant level of pension savings (between £19,400 and £51,300 at retirement) who have no additional defined benefit pension to fall back on.