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The ten vital issues pensions Guidance must explain

 

The Government’s proposed free Pension Guidance service will have a huge impact on whether the entire reform programme of flexibility and choice for pensions actually works well.  Guidance is only a start, but an important start to ensuring people know what they need to consider when they are told they have reached their scheme pension age.  If the Guidance works well, it can ensure people are able to make sensible choices.  It must also help people realise the value of paying for advice, beyond just the free Guidance.  In addition, I would like to see the FCA require all pension companies to give people a simple one-page standard statement explaining what type of pension they have, whether there are any penalties or guarantees, what charges are involved and how much money they have.  This ‘pensions passport’ would mean the Guidance sessions can focus on the important issues, armed with the relevant information.  Here are the top ten issues the Guidance must explain:

 

1. Do nothing option: Make sure people know, right at the start, that they don’t actually need to do anything at all if they’re still working or have other pension income they can keep their money invested for longer (or just take tax free cash but nothing else).  Many people have been buying annuities because their pension company has sent them a wake up pack, but the wake up pack is only sent because the person is reaching the pension age they originally selected – sometimes age 55 or 60, which seemed a reasonable choice many years ago.  However, most people are now working on longer, so they don’t actually need their pension yet, and if they do nothing they have a chance to build up a bigger pot for later.
2. Tax on withdrawals: Make sure people know that they will have to pay tax on any large sums they withdraw.
3. Tax free pension returns:  Make sure people know that by leaving the money in their pension fund it will still earn tax free returns, whereas cashing it in to put into another investment or bank account will mean paying tax on any returns or income.
4. Inheritance tax advantages of pensions:  Make sure people know about the inheritance tax benefits of pensions, so that if they die before age 75 they provide tax free, cost free life insurance for them, whereas if they withdraw the money, any other assets they may buy will usually go into their estate.  It is also vital that the guidance makes sure people know they should nominate a beneficiary so that their fund does pass on to the person they want it to go to without tax, as it will otherwise have to go into their estate
5. Financial planning:  Point people to financial planning tools – they need help to plan their pension income (state pension forecasts etc) and any work income, together with other pensions or downsizing their house, to get a better picture of what their income prospects are.
6. Long-term care:  Explain the benefits of leaving money for later life, in case of need for care.
7. Life expectancy and personal circumstances:  Help people recognise their life expectancy, the impact of health issues and what this may mean for product choice or investment risk, buying annuities, covering a partner and so on
8. Inflation:  The guidance needs to explain the risk of inflation if people do not protect themselves against rising prices and do live a long time.
9. Products and charges:  After all this, if the person still wants to take money out, they need to be told about the various products.  Guidance should explain the risks of annuities (as well as the benefits), the risks of drawdown (as well as the benefits), and point to information on any new product types that are introduced.  People must also be told how to find out about charges or commissions when buying products including annuities or other products, since many have no idea they pay commission even if they receive no advice.  (Ideally, commission should be ended and only pounds and pence fees quoted to be totally transparent).
10. Financial advice:  The final vital part must help people find expert independent financial advice, and explain why paying for advice can be beneficial to help with this important decision

 

The above are the vital issues that the Guidance needs to cover.  The default option should, in my view, be a ‘do nothing for now’ option.  The more we can encourage people to keep money in their fund for later life, the better.  Many will still be working or have other pensions and, therefore, could keep the fund invested for longer.

ENDS