OpinionJul 30 2014

Plans to revolutionise pensions make headway

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The proposed rules for the pension revolution, published last week, confirmed that power is being taken from the industry and handed over to the investor.

If all goes according to plan, more money should end up in the pockets of pensioners and less in the coffers of insurers.

Crucially, there should be more need for advice and guidance, as investors face major decisions on how to make the most of their retirement cash.

There has been much debate about where guidance will stop and advice will start.

Financially, at least, we now have an answer. Anyone who wants to convert a final salary pension of more than £30,000 will have to take full advice, because of the implications of making a wrong decision.

Encouragingly, the Treasury is now looking seriously at adopting the idea of a pension passport. This could provide all of the essential information about several pensions in one document.

They have created a market where advice will be needed and where the value of good advice should be obvious to all

Insurance companies would be able to offer an income for a pension pot, but they must also make clear what other options are available.

Also, investors will be encouraged to think about a range of issues such as health, tax status, retirement plans and their spouse. So no more passing out single life annuities to married men where the spouse has no pension.

And the guidance must also point out how people can get full financial advice. Taken as a whole, these proposals could be the best thing to happen to independent financial advice in more than two decades.

They have created a market where advice will be needed and where the value of good advice should be obvious to all.

They have destroyed the status quo, which allowed insurance firms and lazy IFAs to simply pick up a cheque when an investor was shunted directly from an insurer’s pension to its in-house annuity.

Looking ahead, the simpler rules on inheriting pensions mean there will potentially be more money for widows and children who, again, may well need advice on how to invest for their own futures.

Rather than a one-off event, or more likely a sale, at the point of retirement, financial advice will become a hand-holding process through retirement. As needs change, so the need for further advice will arise. It really is a very exciting time to be a financial adviser.

Penalty for slow pension uptake

There have been a fair few complaints about the decision to cut the rewards to those who delay in taking their state pension.

This change had been announced previously, but many failed to pick it up. Basically, the 10.4 per cent a year bonus will be cut to 5.8 per cent for those retiring after April 2016. And the money will no longer be able to be taken as a lump sum.

To be fair a cut to this bonus was well overdue. The 10.4 per cent rate was far too generous in a low interest rate environment. But I don’t understand why it is only to be applied to those who come up to retirement from April 2016.

I also struggle to understand why people who retire after April 2016 and choose to defer are being banned from taking the accumulated cash as a lump sum. The money is, after all, taxable.

For those who retire before April 2016, and can afford to do so, deferring the state pension looks like a terrific option.

But once that deadline has passed, it will suddenly look much less attractive. The 5.8 per cent on offer might by then seem like a pretty average return, considering pensioners will be losing use of the money in the meantime.

Putting the record straight

I wish to apologise to those I misled a couple of weeks ago. I referred to high-risk Sipp investments in a piece about the dangers of transferring out of occupational pensions.

This led some to think I had it in for Sipps, and even led a few to offer me lectures on why not all Sipps are high risk.

Regular readers know I have always been a staunch advocate of Sipps for the flexibility and opportunities they can offer.

What has concerned me are those who have sought to use them as an opportunity to add an extra layer of charges, especially to investors who only need a simple pension.

My comments were based on the regulator’s reports. But it would have been clearer had I said high-risk investments within Sipps.

I will tread more carefully in future, if only to avoid receiving another lecture.

Tony Hazell writes for the Daily Mail’s Money Mail section. He can be contacted at t.hazell@gmail.com