OpinionSep 24 2014

We should be nervous as free advice day looms

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It is a little over six months until the new pension rules kick in. But for now, many investors are caught in a no-man’s land – and it is one that should have the regulators and pensions administrators deeply concerned.

From next April, investors will be entitled to impartial advice free of charge. However, the shape of that guidance has yet to be determined, and some of the suggestions coming from the insurance industry make me feel decidedly uneasy.

Prudential appears keen on the idea of small group sessions. It published a poll saying that 57 per cent of 103 IFAs it questioned thought that up to 10 clients at a time could be helped through group advice.

Leaving aside that 103 is hardly a representative sample, let us examine the idea. Put together an average group of 10 people and you will have widely different pension pots and retirement ambitions. But you could perhaps deal with this by advance filtering.

The key thing is the sheer number of pension contracts, each with its own conditions, terms, tweaks and whistles. These make the idea of group sessions a non-starter.

The key thing is the sheer number of pension contracts, each with its own terms, conditions, tweaks and whistles

The pensions industry has brought this on itself. It wrote these contracts and, in some cases, appears to have mislaid them. Now, having produced so many different versions of a pension, it will have to help to deal with the fall-out.

The fact is that for the next 10 to 15 years, we will have a generation coming up to retirement that has suddenly been presented with complete freedom over their pension income – but not been educated to deal with it.

Many will have done nothing more than stick their original contract in a filing cabinet and paid a regular premium for the past 30 years. Now they are no longer being shoe-horned into annuities, they will need proper guidance as their retirement approaches.

And the insurance industry should not skimp. There is a strong argument that they forced the Chancellor’s hand over providing unrestricted access to pension savings.

If they, as a group, had not proved so bloody-minded over annuity reform, perhaps he would not have felt the need to blow the old system completely out of the water.

Don’t get me wrong. I am 100 per cent in favour of the reforms. But I also realise how much help people are going to need if they are not to make hasty decisions they will repent throughout their retirement.

Face the facts about annuities

There seems to have been a concerted attempt to blame George Osborne’s pension reforms for the recent fall in annuity rates.

Investment Life and Pensions Moneyfacts produced a report showing that annuity rates experienced their biggest monthly fall for three years during August.

The average income from a £50,000 level annuity for a 65-year-old without a guarantee fell 2.6 per cent from £2,874 to £2,797.

Industry commentators have since linked this with the upcoming pension freedom.

There is something in the argument that, perhaps, those who are healthy and expect to live a long life are now the most likely to take an annuity.

But the more obvious reason is that 15-year gilt yields have been falling and were down to 2.7 per cent in August, compared with just over 3.4 per cent at the start of this year. This would have resulted in lower annuity rates with or without the pension reforms.

Lower inflation will hit savings

The tiny fall in inflation from 1.6 per cent in July to 1.5 per cent in August brings no succour for savers.

The low level of consumer price inflation leaves the prospects of an interest rate rise sitting out on the horizon, even if the unemployment rate is now well below the target set by Bank of England governor Mark Carney.

In fact, things are getting worse, if that were possible, with a succession of building societies snipping away at their savings rates.

Nationwide will from 1 October take 0.2 percentage points off its Loyalty Saver account, so its top rate will now be 1.5 per cent before tax. Although that is still better than the average one-year bond rate of 1.19 per cent.

It is not just savers facing a squeeze. Investors have enjoyed bumper dividends, but the party could be over. Payouts climbed just 1.2 per cent in the second quarter to £25.8bn. Tesco cut its half-year payout by 75 per cent and there has been speculation of other cuts.

One bright point is that the fall in sterling may help improve things for those with dollar-denominated dividends. But overall, prospects are not bright for those seeking income.

Tony Hazell writes for the Daily Mail’s Money Mail section

t.hazell@gmail.com