Reforming retirement

Collective defined contribution schemes? Right to free advice? End of the lifetime allowance? A 30 per cent flat rate tax relief on pensions? If the Budget did not give financial planners and their clients enough to mull over, there have been plenty of announcements to consider since.

With many of these now firmly on the agenda following the Queen’s Speech in June, what, if any, initiatives are likely to progress to actual business-critical issues for IFAs?

Guidance or advice?

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At the time, the 2014 Budget was described by some as a ‘Budget for financial planners’ due to the assumption that new-found flexibility at retirement would drive millions of pensioners into the arms of advisers. That may still be the case, but with free, impartial face-to-face advice also being mooted, IFAs are rightly questioning whether they are to be involved or side-stepped.

It is unlikely that product providers will be involved in providing guidance, and some senior insurers have already ruled this out. But free consumer information services such as the Money Advice Service (Mas) and The Pensions Advisory Service (TPAS) could gear up to step into the breach. In a bid to carve out a role for IFAs, the Personal Finance Society (PFS) has proposed a flat-rate fee system designed to engender confidence among retirees in financial planning advice. This could be a step in the right direction but clearly is designed to be complementary to free advice, not an alternative.

That is no bad thing, as any form of ‘advice lite’ or guidance is likely to fall some way short of providing the sort of detailed cash flow planning or product recommendations that individuals at retirement need to make actual decisions.

In that capacity, a complementary service which builds on the free general discussion the client has already had and formulates clear, client-specific plans with product recommendations (and a review cycle) makes perfect sense. Consumers are likely to find that a DIY approach, based on web research and online comparison tools following their free chat, is more complex than they might imagine.

If IFAs can position their service as a cost-effective extension of the free advice that consumers will be offered, they may find clients are willing to pay for the next stage having already established, in broad terms, what they are looking for. Played right, this should be a benefit to IFAs, not a threat.

What is collective DC?

Pensions minister Steve Webb has long been developing the concept of a collective defined contribution system for employers, which was the subject of a consultation in 2013. The idea, taken from existing models in the Netherlands, envisages a hybrid occupational pension that sits somewhere between old-style defined benefit or final salary pensions and new-style defined contribution. Rather than having an individual pot, your savings are pooled with thousands of other workers, which reduces cost and removes the burden for members to manage their own money.

There is also an element of guarantee provided to investment returns. While an improvement on individual DC, collective DC (‘CDC’ – as if we needed more three letter acronyms, or TLAs) does have significant hurdles.