Pension freedom: A chance to rebrand retirement altogether
THE chancellor’s pension reform proposals could, if implemented, not only change pensions as we know them, but the way people plan their retirement savings altogether. We aren’t there yet. But we should finally reach pension freedom in April 2015, when people will be free to decide, without restrictions, what to do with their pension pots when they retire.
Why is this important? The chancellor has fired a dart into the rump of a very large elephant that has sat in the way of better retirement outcomes – insurers selling badly-priced annuities to their own customers. The FCA is also conducting a market study into annuities and will, I expect, complete the job of removing this blockage. Ultimately, however, by levelling the playing field, the end of mandatory annuities should mean more competition in the market for all retirement income solutions, and some innovation too.
Overall, this has the potential to increase the value for money obtained by people at retirement by 25 per cent. It won’t be a panacea, and not everyone will end up better off. As with all freedoms, people will be free to make bad choices: to borrow too much, to invest too great a proportion of their wealth in residential property, or to leave money languishing in cash, while eking out a frugal existence.
Yet this isn’t a reason not to act. The government will require every pension provider to make available a face-to-face conversation at retirement with an impartial expert. The Pensions Advisory Service is probably the closest thing that exists to date for this vision. But more broadly, it is essential that the industry responds with alternatives to annuities that are fit for purpose. Expect more multi-asset investment offerings trying to produce stable income above the risk free rate.
And the benefits of flexibility should not be understated. Pensions now become reverse Isas: you pay no tax on the way in and some on the way out. But after age 55, you can take your money when you like and how you like. This is an opportunity to rebrand retirement savings completely – away from the bad name pensions have acquired.
This should mean pensions becoming far more popular than before. As more people save through a workplace pension under auto-enrolment, with minimum quality standards applied by government, we might yet see a gradual, sustained increase in retirement saving. Goodness knows we need to. On my calculations (assuming annual investment returns equal to inflation), someone on £29,000 a year needs to save 29 per cent of their pay over £5,668 for 40 years to retire at 65 on a reasonable income.
But while the mood music has changed, and we can expect new ideas on retirement solutions, what will really make the difference is how firms engage with consumers. This is a new opportunity to do the right thing by them, and to talk to them on their own terms.
Alan Higham is head of retirement insight at Fidelity.