The government plans to introduce a new guarantee, enforced by law, that everyone who retires with a defined contribution pension will be offered free, impartial, face-to-face advice.
Chancellor George Osborne says the advice should ensure they get the most from the choices they now have as all remaining tax restrictions on how pensioners can access their pension pots are removed.
Mr Osborne says the advice propositions means those who still want the certainty of an annuity, as many will, will be able to shop around for the best deal.
Very little was revealed by the Budget about how the advice proposition would work but Mr Osborne says he will provide £20m over the next two years to work with consumer groups and industry to develop this “new right to advice.”
“I am proposing is the most far-reaching reform to the taxation of pensions since the regime was introduced in 1921.”
Darren Philp, head of policy at The People’s Pension, says guidance for people nearing retirement was much needed.
He says: “The government’s current policy of defaulting people into pensions and then leaving them in the lurch when it comes to their retirement was no longer fit for purpose.”
Tony Clare, pensions advisory partner at Deloitte, agrees that giving people free advice at the point they make retirement decisions is an excellent idea.”
However PricewaterhouseCoopers says the cost of delivering the service could be as high as £120m a year.
About 400,000 people will need access to free guidance this year as they decide what to do with their defined contribution pensions pot, now the system has much more flexibility and choice, Philip Smith, director in PwC’s defined contribution pensions team, points out.
He says this equates to a minimum requirement of 400,000 extra hours of guidance this year.
Mr Smith says this could lead to a need for an additional 500 suitably qualified people to deliver this advice, risking demand outstripping supply.
He says: “The free face-to-face guidance guarantee at retirement needs to be paid by someone, but questions remain over who will shoulder this substantial burden.
“Insurance companies could be facing a double hit from the government’s proposals as they shoulder the duty of delivering this guidance at the same time they are contemplating how to fill the likely contraction of their annuities business.
“The most likely outcome is that pension scheme members will ultimately end up paying for the free advice indirectly, as providers pass on some or all of the costs in member charges.
“The government also needs to set out a plan on how they will address the potential guidance gap, as the immediate need for suitably qualified people at the providers will be difficult to fill.”