Is the shine coming off pensions freedom?

It’s very hard to argue against the words ‘freedom’ and ‘choice’. So when the Budget announcements hit us in March, they were met with mainly enthusiasm. Most commentators and pension experts agreed giving people more choice was a positive thing. There were concerns, obviously, but the overall atmosphere was one of optimism.

But as time has gone on, we have learnt more about the proposals, and the legislation is now taking shape. And it now seems as if doubts are creeping in about the new world and the potential for people to lose out.  These doubts appear to be clustering around the following:

·         Guidance guarantee – we now know who will be delivering the guidance guarantee, but we don’t know what it will look like, what it will cover, or how and to whom it will be promoted. To get people to take it up we need to sing about it from the rooftops but we are running out of time to get this right.

·         FCA regulation – the FCA has said it will not be strengthening its rules ahead of April, instead relying on the guidance and seeing how that develops before introducing anything new. But there are growing calls for it to develop a ‘second line of defence’ to protect those people who don’t get advice or guidance.

·         Annuity bashing – there is a growing concern the Government and others are ‘annuity bashing’ by positioning annuities as a toxic product, even to the extent of suggesting some annuities should be unwound. A more informed discussion about annuities needs to happen (by all) and how they could help secure a valuable stream of income for retirees.

·         Defined benefit transfers – those with defined benefit pensions may decide to transfer to gain advantage of the hyped pension freedom. Of course, after April, they will need to have taken regulated advice, but even if the advice is to stay put that may not stop some determined individuals, or those who decide to jump ship before April.

·         The risk of running out of funds – the latest survey (from Hargreaves Lansdown) suggests 12% of savers are expected to blow their pension pots next April. But equal to the risk of people just squandering the whole lot, is the risk some will withdraw their funds (either gradually or in full) from pensions, pay too much tax, end up in poorer or higher charging investments, and outlive their funds. The Government, however, appears to be laissez-faire about the risk people end up with just a state pension in their later retirement. The other side of the coin, obviously, is the tax windfall the Government can expect from withdrawn funds.

I’m not saying the reforms are ‘doomed’. Of course, they’re not. But these concerns need to be addressed and resolved before the system goes ‘live’. Unfortunately, however, the Government appears to be resilient to admitting anything is amiss.

The pensions freedom agenda is a fantastic opportunity. But the Government needs to listen to the growing concerns and do something about them. April 2015 is only 160 days away, and there is a lot to do. The Government needs to have courage and if it – and the FCA – can’t achieve what they need to in the time we have left, then the reforms need to be delayed until October 2015 or April 2016 rather than risk people making the wrong decisions.

But these reforms have been brought about on the back of a political agenda. And with a May 2015 election looming, there is no chance the Government will delay them and risk looking bad. There is simply too much riding on this politically.

That’s a shame. I don’t think we don’t have enough time to prepare the ground and introduce these reforms in the right way. And instead the Government is putting politics ahead of people.

 

Better regulation please

Another week, another pensions reform announcement. At the moment, the pace of change feels relentless.

But, for once, the detail of this particular announcement wasn’t important (even to pension geeks like me). Instead, what was significant was the packaging of the announcement, and the reactions it provoked.

Let’s cover the detail to start with. Under the new rules, (if schemes offer it) people can take money from their uncrystallised funds once they reach the minimum age. 25% will be tax free, and the rest taxed as income. This differs from drawdown, where the whole 25% tax-free cash can be accessed in one go, without touching the other funds.

This is not news. We knew all this from previous HMRC announcements. It had even been given a (typically) non-friendly pension acronym of UFPLS, just so normal people wouldn’t have a clue what it meant. And it had two functions. First, to allow a form of phased retirement. And second, to help those schemes who didn’t want to go to the trouble of introducing drawdown (FAD) to provide a way of allowing their scheme members access to their funds on retirement.

But all this has been turned on its head. The Treasury has taken this concept and packaged it very neatly indeed. The headlines this week scream out ‘access pensions bank account’. Isn’t that lovely and friendly? So much better than UFPLS, don’t you think? I think it’s a masterstroke. UFPLS goes from an unloved unwanted concept to a must have.

But it has provoked strong reactions. One must be fear amongst pension providers and schemes. They were busy drawing up plans to offer drawdown to scheme members from April. Only those who couldn’t be bothered with that would have even considered UFPLS. But now, all schemes will be forced to at least think about whether to offer it. Otherwise they risk denying members their ‘freedom’.  (Although my experience is most people want to simply take all their tax-free cash in one go as soon as they can.)

Getting this additional requirement in place for April is going to be a headache schemes and providers can do without. Plus can any provider or scheme live up to the promise that the phrase ‘pension bank account’ evokes? Will people be able to get hold of their retirement fund from a cash machine? Doubt it. The banks with their technology, however, may become interested in accepting transfers of pension funds.

Another reaction is the ‘freedom vs protection’ debate. This has been simmering for some time, but has really caught fire this week. On the one hand some argue people are responsible savers and will therefore be responsible spenders. We should give them the freedom to take their money when and how they want to. And these latest announcements – pensions bank accounts and changing tax rules on death – only encourage people to do the right thing, and not squander their money but leave it in the pension environment for when it’s needed.

On the other hand, there is a growing voice arguing that we are creating a whole host of freedoms with little or no regulation, and that this has the potential to end nastily for some.

I find myself in the latter camp. Of course I trust people. Of course I think they are responsible. But I know that taking a sum of money and making it last for a lifetime is a really difficult trick to pull off. People need to be aware of the risks and if possible protected from them. And that’s the job of good regulation.

The Treasury is hell bent on creating the tax environment for pension freedom. Let’s be honest, it’s a vote winner, at a time when winning the ‘grey vote’ (before it walks to UKIP) has never been as important. But the FCA seems to be on the back foot and playing catch up. It has been thrown several balls over the past few months and is struggling to keep them all from dropping. The flagship of the guidance guarantee is obviously its focus. But its regulation around retirement income is woefully inadequate for the new world.

I’m sure the FCA is busy working on rectifying this. But decisions are being taken now by advisers and people about retirement income, even though the new rules don’t come in until for another six months. So, we need to see updated regulation, including how to protect people under the new rules. And we need to see it soon.

Can we force people to seek out guidance?

The party conference season is, thankfully, drawing to a close. With such a packed pension policy agenda there was never going to be a lack of subjects to chew over. One area always bound to come under scrutiny was the guidance guarantee. And at one fringe event, some were making the case for guidance to be compulsory – rather than relying on people seeking it out themselves.

I can see their point. The retirement market was broken. Before March, too many people ended up buying poor value annuities, probably on the wrong terms for their personal circumstances. But whilst the FCA took its time investigating why in a seemingly endless series of reviews, the Treasury steam-rolled in with a – dare I say it? – lucrative (for them) solution of just getting rid of annuities. Cos that’ll solve the problem right?

I’m not sure it did. And it certainly created a whole host of other problems.

People will now have the freedom to use their pension money in the way they see fit. The problem is, will they know what the best solution is for them? Or will they squander the money? Or hoard it in a poor investment? Or be fleeced in an inevitable scam?

The solution to this, of course, is retirement guidance and advice. Without these, I really don’t think pension freedom can ‘work’. But we need people to seek out and get the guidance they have been promised. And from there hopefully be encouraged in buying advice from a professional adviser.

But the signs, so far, from endless focus groups, aren’t great. Predictions of take-up of guidance range from 10% to 50%. We need to aim higher. But how do we do that? And that’s what led those in favour of compulsory retirement guidance to make their case.

But how do you compel someone to get guidance? One solution may be to bring in a requirement that unless the person has accessed advice then they can’t have a retirement product. But this won’t work on many levels. What happens if they aren’t buying a retirement product? And instead withdrawing the lot and squandering it on a new kitchen (although that doesn’t sound like ‘squandering’ to me)? Or putting it into an ISA? Or if a scam is involved I’m sure there will be devious slights-of-hand to bypass this new requirement.

Maybe instead we should have more draconian requirement that people cannot access their money until they have taken guidance. But are we seriously going to tell people they cannot get at their money? There will be outraged, and quite rightly so. In the end, compelling people to take guidance could simply mean they will be so put off acting they will leave the money where it is and survive on their basic state pension, when, in fact, they are entitled to a much higher retirement income.

Compulsion won’t work. We have to signpost and encourage people to get guidance. It won’t be easy. It will cost money. And results will start off poor. Guidance needs to be mentioned every time we say retirement. We need to ram it down our poor customers’ throats. We need to drag it up at each and every opportunity. We need it in big shiny lights on everything we ever do which mentions future income. And by ‘we’ I mean providers, advisers, trustees, consultants, employers, government agencies, regulators, media, social media, government departments, debt agencies, CAB and so on and so on.

This has to be a collective effort. Otherwise it won’t work.

And once we have successfully got people into guidance, we need the best method of getting them out the other side. Hand offs to professional advice need to be everywhere. The FCA needs to seriously think about the next steps people can take, and what role a new type of simplified advice could play. We cannot push people though guidance and then leave them washed up, gasping for air, and nowhere to go.

Guidance seems a simple easy concept. But it’s not. This is tricky. Very tricky. But we need it to work so the new pensions freedom can also work. Otherwise 2015 and onwards is going to be one big mess.