Coming out as "protectionist"

With the Labour party toying with the politically risky idea of rolling back the new pension flexibilities it is perhaps a good time to consider where we may be going.

The success of the flexibility and freedom of choice for all with their pension assets hinges on the quality of the guidance AND advice that individuals receive. Everyone in the industry can already tell you that a form of generic guidance will be insufficient for the majority to make the right decision and will come down to chance without the correct appreciation of the risks. Without an appreciation of the risks many will experience poor and disappointing outcomes. With flexibility and freedom comes a bewildering array of choice and complication and the opportunity for mis-selling and further devaluation of pension savings.

If the first step on the path to advice is guidance, albeit restricted to pensions assets, then this will give us the greater chance to see better outcomes for members.

However, for this to succeed financial education needs to be increased at all levels. Employers should be encouraged, on a safe harbour basis, to provide financial education to all staff, from new joiners to those looking to leave and move into retirement. Schools need to engage with charities like MyBnk and the like to start the cultural change to financial literacy, knowledge and understanding across the board.

We must recall, and not forget, that drawdown was described just weeks before the 2014 Budget as a highly sophisticated product only suitable for wealthy investors. Drawdown is complicated and a minefield for laypeople to address alone. With this the prospect of pensioner penury is a very real one.

On one hand many people are naturally frugal and the argument exists that they may live on too little to keep what they have. However, many will spend too fast too soon and run out of money and fall on the state.

By retaining an income requirement a level of guaranteed income, a safety net remains, with full flexibility allowed for benefits in excess of this.

However, continuing with complicated rules does also devalue pensions and almost certainly results in individuals being forced into buying annuities at a time when they do not give the best value. Although with improvements in longevity many will still win this bet.

So, on balance I believe that a brake should be applied to the flexibilities:

 

1.   Delay the introduction of full flexibility (see 2) for the process and guidance to be properly introduced. Allow capped drawdown, as now, without triggering the Money Purchase Annual Allowance

2.   Continue the Minimum Income Requirement (MIR) for flexi-access drawdown at £12,000 pa.

3.   Continue with the small pots solution, indexed with Consumer Price Index (CPI) so members with small funds can still receive these where the MIR is not reached

4.   Increase the Minimum Pension Age (MPA) to 60 (for flexible access) to prevent early depletion of funds

From conversations across the industry and it appears their two broad camps exist. One in support of the full reach of the freedoms, with the clear upside for many. The other, as I am, proposing a check to this trajectory, mindful of the potential for significant downsides… the debate will continue.

 

David Brooks

Technical Consultant

Telephone: +44 (0)20 7893 3456

Email: contactus [@] broadstoneltd.co.uk