Blowing it on a Lamborghini?
If you are approaching retirement, advice is crucial says Chris O'Brien of Ipsos Loyalty.
When you start to talk to consumers about pensions or retirement planning, the light dies behind their eyes a little. In general, it’s not thought of as a particularly exciting topic. For those whose retirement is still years off, putting money aside for retirement is an exercise in extremely delayed gratification which has little relevance to their current day-to-day life. However, it may have just become marginally more exciting for are those transitioning into retirement over the next few years. This is because they are now faced with a vast and multiplying number of choices about how to ensure they have enough income to cover their basic living costs after retiring. Perhaps ‘exciting’ is not the right word. Perhaps ‘scary’ is.
In April this year, the changes to defined contribution (dc) pensions announced at the 2014 Budget came into effect. These changes include being able to access all funds from the age 55 up (no longer being made to buy an annuity), removing restrictions on how much you can put into your pension and changes to the tax regulations1. As the widest-ranging change to pensions in generations it has sparked a frenzy of activity across the financial services, with providers trying to position themselves as an attractive home for retirement savings. From investment boutiques to retail banks, everyone is now thinking about how to provide potential ‘solutions’ to retirees.
The impact of the policy change on consumers in the longer-term is unclear. Even the country’s knowledgeable finance commentators are unsure about what consumers are going to do with their new-found freedom:
“Pension saving is going to be huge given what happened in the budget about annuities. In some ways it feels very positive to take away that stranglehold of the annuity business and to take away that once only lifetime decision that can go very wrong, but on the other hand it’s also profoundly worrying because it does mean that a lot of people can end up spending what they’ve saved and it’s frightening, but pension saving is at a new high so all of that is going to be a big thing” Non-attributable, Freelance Press – Personal Finance Journalist survey 2014
If the experience of the US and Australia is repeated, then we will see greater numbers drawing-down cash from their retirement pots to spend as they go, rather than purchase an annuity. Due to this there is a concern that pensioners are going to ‘blow’ their pension savings on extravagant purchases.
In behavioural economics it is recognised that people are poor at assessing investment risk impartially2, and can be poor financial planners in the longer-term. This means that there is now plenty of opportunity for new retirees to make decisions which fail to optimise their hard-earned pension savings. This could be anything from purchasing a poor quality annuity, paying more tax than is necessary or by falling victim to attractive-sounding scams from criminals now moving into the market.
One of the key ways the Government is trying to mitigate the risk of unwise spending, is by offering guidance to retirees through their newly launched Pension Wise service. However, it is important to note the word ‘guidance’ rather than advice here. Whilst the Government has a duty of care to offer some guidance on the best ways to utilise pension savings, they are unable to offer independent and tailored financial advice, which is something that now has to be paid for directly by the consumer, following the RDR. It is more likely that this kind of paid-for advice is not going to be used by the very people who need it the most. If you consider the average size of a dc pension pot is around £30k3, spending £1k on advice may not seem like the best use of money to those retiring.
A potential issue with Pension Wise is that, due to the rhetoric surrounding the service, pensioners may think they are going to get tailored advice, whereas in fact they get a meeting which offers general guidance. Obviously, it is better than nothing, but there is a very real chance that pensioners may feel cut adrift when they are presented with possible options, but not directional advice. That is, if they are even made aware of the service at all.
The liberalisation of regulations presents a great deal of opportunity, but pension regulations and long-term financial planning can be extremely complicated, and retirees will require a great deal of support. 68% of personal finance journalists still feel that the Government on its own is not offering enough support and information for those now approaching retirement. So it will require both the private and public sectors working together to ensure that they are helped to make the best decisions for their retirement. Consumers will often revert to their pension provider and / or their employer, especially where there is no financial adviser relationship in place, so both have a key role to play. There is potential for providers to be working more closely with employers to ensure retirement support is provided via the workplace, and to start taking a more transparent and supportive stance when dealing with customers. Helping to overcome inertia and lack of engagement is a responsibility that should be shared, to help retirees fully consider their options and make well-informed decisions.
1. https://www.hl.co.uk/free-guides/new-pension-rules-changes-2015
2. Pg 6, https://www.fca.org.uk/static/documents/occasional-papers/occasional-paper-1.pdf
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