Pension Freedom Disadvantages Must be More Explicit

The government’s new financial guidance service needs to address three key points or face a “potential crisis triggered by the pension freedoms,” warns the boss of the world’s largest independent financial advisory organisation.

The comments from Nigel Green, founder and chief executive of deVere Group, follow confirmation that the government is to launch a new single financial guidance body.  It is reported that the new body will take on and widen the services offered by The Pensions Advisory Service (TPAS), Pension Wise and the Money Advice Service.

Mr Green comments: “Like many people across the financial advisory industry, I have deep concerns about the government launching yet another financial guidance service.  

Whilst the hard work, skill and dedication of those involved is not in question, the government’s delivery of these services has, to-date, been less than satisfactory. Pension savers have not been served well by them.

He continues: “In launching this new, yet unnamed, guidance service, the government faces three key challenges in order to make it effective and efficient.

First, it must do more to promote the core value of the service and encourage interest.  The number of savers who have taken up Pension Wise’s offer of 45 minutes of free guidance has been remarkably low. And whilst there remain concerns about the delivery and content, some form of guidance is arguably better than nothing when making important, long-term financial decisions.  Therefore, those without an adviser should be encouraged to seek guidance in the first instance, before then working with an adviser.

“Second, the government must make the distinction clearer between guidance and advice.  Guidance might be attractive because it is free, but it must not be mistaken for professional, independent, regulated advice.

Guidance can present all the options available, but advice can help the consumer chose the most appropriate one for them.  Guidance can give the consumer the topics, themes and questions – for example about risk appetite – to then ask an adviser. Guidance is generic, whereas advice is tailored to the individual.  As such, guidance is not a substitute for advice.

Third, the new service must warn the public more explicitly about the inherent disadvantages of the government’s pension freedoms.

The over 55s who want access to their pension pots must be made fully aware of the downsides of the ‘freedoms’. 

Many are initially attracted to the idea, but when confronted with the reality, they, quite rightly, ditch the notion of cashing in their pension in favour of a more traditional drawdown method. 

This is because after the first 25 per cent which is tax-free, the rest would be subject to income tax.  Understandably, most retirees are loathed to give up to half of their hard-earned retirement savings over to the taxman for the privilege of drawing down their own money earlier.  This must be made clearer.

Our advice is to resist, where possible, the temptation to access pensions to avoid the risk of compromising retirement ambitions, making hasty decisions, and facing substantial tax charges.”

Mr Green concludes: “Failure to address these points will mean that it is unlikely that it will be possible to halt a potential crisis triggered by the pension freedoms.

Retirees that are better informed will, typically, be better off.  This is good for everyone – not only would they have more financial freedom, but they would be less likely to rely on the State during their retirement, and they would be able to contribute more to the economy.”

Author: Dylan Jones

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