Personal finance: Pensions guidance ahead

The new flexibility will allow people in defined contribution pension schemes to take their whole pot as a cash lump sum. Picture: Jon Savage.

Details of the new guidance system were unveiled this week, three months after the chancellor pledged to ensure people have access to impartial, face-to-face advice when they cash in their pension.

The guarantee was part of the government’s proposed pension freedoms, set out in the Budget and which come into force next April. The new flexibility will allow people in defined contribution pension schemes to take their whole pot as a cash lump sum. Of that, 25 per cent can be taken as a tax-free sum (as now) and the remainder charged tax at their marginal rate, rather than the current 55 per cent.

George Osborne has now rowed back on the guidance pledge, however. While it will still be free – paid for by financial services companies – and impartial, most guidance will be online or by phone rather than face-to-face. It will also be generic, stopping a long way short of providing full advice.

Neil Lovatt, product director at Scottish Friendly, accused the government of “window dressing”.

“It’s a solution that cannot possibly cope with the level of demand that should be placed upon it, which leads me to believe that it won’t be implemented properly,” he warned. “I fear we will be revisiting this topic in a few years’ time with a lot of people claiming that they told us so.”

The guidance plans will leave many people dangerously unprepared for the complex decisions they face at retirement, according to one leading adviser north of the Border.

“While they are well intended, there is no doubt in my mind that the government’s proposals for advice provision around the new pensions flexibility will not serve everyone well,” said Paul Lothian, director at Verus Financial Planning in Dundee.

“There is likely to be a dumbing- down of the level of engagement and the sophistication of the advice available compared to what an individual might actually require.”

The guidance will be delivered by organisations including the Money Advice Service (MAS) and The Pensions Advisory Service, contrary to fears that pension providers would be given the responsibility.

MAS, dismissed by the Treasury select committee last year as “not fit for purpose”, will mainly provide an impartial signposting service rather than concrete recommendations.

“There is of course a risk that individuals will go through the motions of a consultation with MAS but then go on to spend their pension pot frivolously or recklessly anyway,” said Lothian.

Fears over the inadequacy of the guidance offered are fuelled partly by the extra complexity and risk created by the greater choice people will have at retirement from next April.

That’s why people must be made aware of the different types of advice on offer, said Sarah Tory, financial  adviser at Shepherd & Wedderburn  Financial.

“Human nature will dictate that if someone is looking to access their hard- earned cash and is offered a 20-minute questionnaire or a full financial review that could take two hours they will be very prone to go for the former,” she said.

“The key is getting savers to understand the importance of the choices they are making.”

Those decisions include working out how much cash you’ll need at different stages of retirement, what to do with large cash sums and how to avoid being hit by surprise tax bills, she said.

One drawback of guidance as opposed to advice is that people don’t have the same recourse to compensation should the wrong decisions be made.

“I accept there has to be something available for the many many people looking for advice in this area,” said Tory.

“But many will be unable or unwilling to engage in a comprehensive financial review and something that falls alarmingly short of real advice could have some unpleasant unintended consequences.”