The Budget pension reforms rest on a belief that with age comes wisdom and that we will make prudent choices. But the last big pension reforms encouraging us to take out personal pensions resulted in the mis-selling scandal. Has George Osborne swung open the doors to another debacle?
Much critically hinges on the provision of “guidance” – quite distinct and separate from the provision of “advice”. This is no fine semantic hair-splitting, but a matter of key importance for those seeking help in their pension decision-making. Unfortunately, the Budget speech made them seem interchangeable. This is not so.
The new pensions freedom came with a critical qualification in the Budget. “With the right consumer guidance, advice and support”, said Osborne, “people should be able to make their own choices about how to finance their retirement”.
To ensure people get the right support and guidance, the government says it will “guarantee” that individuals approaching retirement “will receive free and impartial face-to-face guidance to help them make the choices that best suit their needs. We will introduce a new duty on pension providers and schemes to deliver this ‘guidance guarantee’ by April 2015”. The Financial Conduct Authority has been tasked to ensure that this guidance meets robust standards.
In broad terms, “guidance” is a restricted form of advice, setting out the options available and a briefdescription of financial products available. This may not be a full list, and no advice is given as to the potential risk and rewards of these products or which ones an individual should choose.
“Advice” – provided by a qualified independent financial adviser, can comprise the full range of financial products and providers available. All advisers have to be approved or authorised by the FCA. An adviser will also consider products from all firms across the market, and have to give unbiased and unrestricted advice. For this full service advice, a fee is charged.
“Guidance” provides the broad outline only and is being made available for those who cannot or who do not wish to pay an adviser fee. It leaves retirees free to make their own choice of financial product and make their own risk assessment between each product and investment style.
It is open to the objection that those who are of modest means – and most in need of support – will get inferior support. And all this could prove a legal minefield if a retiree finds that an inappropriate choice has been made. “Ah, but this was the guidance I was given!” may not stand up in court, but were “advice” given, this could form the basis of a valid complaint.
Osborne should be lauded in his aim to make pensions simpler. Alas, it is never that simple.