Paths to freedom

Paths to freedom

In three months’ time the pensions freedoms becomes reality.

A pensions system which has stayed largely unchanged since 1911 will now give way to one where consumers have far greater opportunities to access their pension savings. This is extremely popular.

The real challenge will be how to make these freedoms work in practice, given that how one chooses to invest one’s money over a potentially very long retirement is extremely complex. Indeed the Pensions Policy Institute rated this as the hardest informed financial decision in adult life.

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Implicit in the new freedoms is the responsibility which rests with it. The buck stops with savers, now turned investors. If they run out of money before they die, it is their fault.

The scale of this challenge should not be underestimated. PPI finds that decisions about accessing defined contribution pensions are difficult as they often require understanding of “complex and uncertain concepts such as inflation, investment and market risks and longevity risk”. Add the implications for tax, dependants, long-term care, product diversity and guidance, and financial advice could not be more important.

What can we expect to see on Pensions Freedom day? We can expect a functioning Pension Wise guidance service including a website. Although I anticipate this will be rudimentary at outset it will evolve significantly over time. The government will seek to avoid an ‘Obama-care’ style meltdown at all costs as almost 2m potentially access the service.

Guidance service take-up has been estimated between 2.5 per cent (from initial Legal & General testing) to 92 per cent (CII). The reality, I suspect, lies at the 25 per cent mark with an additional 25 per cent directly to financial advisers. Engagement with the guidance service and financial advisers, in particular, will offer better outcomes for those who in the past may have defaulted through inertia into inferior annuities from their providers.

What products will consumers purchase? Research offers a few clues. Research suggests 36 per cent will put their money into bank accounts. This exposes consumers to the risk that inflation and charges will erode their savings over time. The banks, spurred by the revelation that pensions have now become a ‘retirement bank account’ may develop eponymous services, perhaps with ‘hole in the wall’ facilities to meet greater demand. Regulatory and compliance risks will be significant.

Almost half (43 per cent) would invest in a savings bond or other product to ensure their capital was safe. Again, a spur to banks and investment houses to develop these products. The issue here is that they must be sufficiently simple to understand including the many risks which could be associated with them. A logical successor to these freedoms would be the development of new Super-Isas which can be annuitised. Isas are simple to understand and are popular. Strong take up may result in major US and Australian investment houses and asset managers showing greater interest in this market.