OpinionJul 23 2014

Overdue freedoms are a huge opportunity for all

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The pensions clock is ticking. We have just over eight months to go before pensions are made fit for purpose – and I simply cannot wait for the revolution to begin.

Another giant step forward was taken on Monday this week when the Treasury published details of its response to the consultation on the new pension freedoms announced in the Budget.

It provided more detail on how the new world will work, confirming that employees will be able to transfer private sector defined benefit schemes into defined contribution plans, thereby enabling them to take advantage of liberalisation post April. Public sector workers in unfunded pension plans will be denied this right.

It also gave more detail on the free impartial financial guidance that will be offered to everyone at the point of retirement with big roles for the much maligned Money Advice Service and The Pensions Advisory Service. Insurers will not be involved – and quite rightly so. As Tom McPhail, head of pensions research at Bristol-based Hargreaves Lansdown, marvellously put it, some insurance companies are about as reliable at looking after customers’ best interests as an alcoholic put in charge of guarding an unlocked drinks cabinet (I should know).

Of course, there are some that do not want the pensions world to change. Ahead of the Treasury announcement, both Partnership and Just Retirement were pointing journalists to the land down under, noting that Australia is looking at ways to step back from its current system (introduced 22 years ago) that allows pensioners to take lump sums from their pensions whenever they want – exactly the kind of liberal system that is heading our way.

“Australia proves that if you give people the freedom to take as much from their pension as they want, then significant numbers will take it,” said Just Retirement’s Stephen Lowe, customer insight director (interesting job title).

“On average, about one-third of superannuation assets [in Australia] are withdrawn before people reach state pension age. And a quarter of people deplete their assets by age 70, when they are still likely to have many years to live.” Just Retirement concluded that the government must learn from the experiences of Australia when finalising the new pension rules or it risks consigning millions of people to a poorer retirement.

Although the figures from Australia obviously provide food for thought, I do not sit in the Just Retirement and Partnership camp. I made this point at a Financial Adviser masterclass event last week on the new reforms, co-incidentally co-sponsored by Just Retirement along with South African-owned Sanlam. (By the way, these masterclasses are well worth attending.)

I just do not believe most people who have saved hard throughout their working lives will then squander their pension fortunes on Ferraris, loose women and holidays in the Caribbean.

I just do not believe most people who have saved hard throughout their working lives will then squander their pension fortunes

Someone who is a prudent saver during his working life typically turns into a prudent pensioner, not an imprudent one. It is about time the pensions system treated responsible adults as adults, rather than demanding they jump through hoops to get what is theirs by rights.

I also believe the taxation system will dissuade people from denuding their pension funds as soon as they hit age 55. Why pay 40 or 45 per cent tax on a pension withdrawal if you can stagger them over a longer period and maybe only pay 20 per cent tax?

A paring back of state pension benefits will also surely make people think twice before emptying their pension pots. Given a choice between plundering their pension, knowing there is the likelihood of financial destitution further down the retirement road, or nurturing their pension in retirement to help provide quality of life, I cannot imagine most people would not opt for the latter.

My view is that the freeing-up of the pensions regime is long overdue. It breaks the nation’s dependency on an annuity market that was not well designed despite the belated efforts of the Association of British Insurers to knock it into shape. But it will not sever the annuity artery. It should allow a new annuity market to emerge that is bespoke, more innovative and more consumer friendly.

In conclusion, the new pensions regime is great on three levels.

First, it is good for independent financial advisers, who should benefit as more people seek advice on saving for retirement and then making the right choices in retirement.

Second, it provides a wonderful opportunity for those financial services companies (the likes of Sanlam) that can create imaginative products for the new pensions era – for example, pension annuities that pay variable levels of income, annuities with surrender values or in the accumulation space target return funds and multi-asset growth funds.

And, of course, most importantly, it is great news for UK savers.

Between now and next April, we – the press, the “industry” and financial advisers – must do all we can to ensure the public is made aware of the new pensions dawn and the opportunities (and pitfalls) that lie ahead.

It is a big challenge – research from Axa Wealth suggests nearly one-third of adults are unaware of the changes heading their way.

I am up for the challenge. Are you? I hope so.

Jeff Prestridge is personal finance editor of the Mail on Sunday