The government has unveiled details of the “guidance guarantee’” aimed at retirees taking advantage of new pension freedoms taking effect in April – and in the process fuelled fresh concerns over the reforms.
The Pensions Wise service will be delivered by Citizens Advice (face-to-face), the Pensions Advisory Service (by phone) and online through a website designed by the Treasury.
It’s being introduced in April as part of a radical shake-up giving defined contribution (DC) pension scheme members much greater freedom with their savings.
From the age of 55 they will be allowed to take their whole pension in one go, with the amount above the tax-free element being charged at their marginal rate, rather than 55 per cent. Savers will also be able to take cash from their pension in small lump sums and get the first 25 per cent of each slice tax-free.
Initial fears around the risks posed by the reforms were calmed by the government’s pledge to provide impartial, face-to-face advice for people cashing in their pension.
That has since been significantly watered down, however, and the latest details have raised yet more questions over the wisdom of the overhaul.
Much of the guidance will be delivered by “guider” with relatively little pensions experience. Each session is expected to last around 45 minutes and will be based on a list of defined questions. The emphasis will be on informing people of their options and, where necessary, pointing them in the direction of professional advice.
But with independent advice unaffordable for many people, experts warn that the service will fall a long way short for what is often a complex decision-making process.
“There is always potential for a hindsight mistake and there could be huge tax implications if you make the wrong decision,” said Graeme Mitchell, managing director of Lowland Financial Planning in Gala.
“These days the information is readily available online to almost anyone. The problem is that very few of us fit into the same mould.”
The extent of the challenge was underlined by research published this week revealing that only half of people in DC pension schemes understand what an annuity is. The report, by the International Longevity Centre (ILC), also found that almost seven in 10 DC scheme members want a guaranteed income from their pension pot.
Yet while that can only currently be supplied by an annuity, it’s expected that a large number of people taking advantage of the new freedoms will cash in their pensions or opt for drawdown (where their pot remains invested and income is taken from it in tranches).
The guidance service must be “fully functioning” by April in order to support the “high proportion of pension savers who have low levels of financial capability and who are confused about what to do in the face of these new freedoms”, according to Baroness Sally Greengross, chief executive of ILC-UK.
But guidance alone won’t be enough, she warned.
“An advice market that works for the many and not just the few is also needed – including mass market advice that meets the needs of those with limited to moderate net wealth. And critically, there is an urgent need to determine how we support those who fail to take guidance or for those who take guidance but are still liable to making poor decisions”.
Some people will run the risk of exhausting their pension savings prematurely. Scottish Widows research out this week revealed that 43 per cent of Scots worry that the new rules could having insufficient savings to last for the whole of their retirement.
There’s also the potential for shock tax bills. Just 38 per cent of DC investors polled by Hargreaves Lansdown last year knew how much tax they’d pay on cash taken from a medium-sized pension. The tax charges on cash taken from pensions could deliver a windfall of up to £1.6 billion for the Treasury in the first 12 months alone, the firm estimated.
Another report, published on Thursday by the Pensions Policy Institute, warned that while April’s changes are popular with savers, they “quickly become daunted” when they begin to understand the potential implications of accessing their pension pots at retirement.
“The findings from the research were encouraging, in that while those with DC pensions were disengaged with the decisions they will need to make at retirement they were capable, when supported, of making some important trade-offs,” said Melissa Echalier, author of the report.
“The risk is that without access to advice or suitable defaults in place they make poor decisions, which could include taking their fund as cash and placing it in very low return investments.”