Adrian Boulding: Three simple steps to an ideal retirement

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Adrian Boulding: Three simple steps to an ideal retirement

The nation’s over-55-year-olds will enjoy ‘freedom and choice’ from 6 April, when they will become able to access their retirement savings in new and exciting ways.

It is estimated that over 4m people will suddenly become eligible for the new pension freedoms on that date. That is the number of people over age 55 whom it is believed are saving into a DC pension and will not yet have turned it into an annuity.

Hopefully many of them will invest a little time in a consultation with the government’s new Pension Wise guidance service before they take the plunge and decide how to dispense their new-found largesse.

This takes the form of a website that focuses on six steps savers should take in deciding how to turn their pension pot into retirement income, namely:

• Check the value of their pot,

• Understand the options they now have,

• Plan how long the money needs to last,

• Work out how much they need in retirement,

• Ask what the tax implications are, and

• Shop around for the best deals.

In addition, Citizens Advice will provide face-to-face aspect guidance and The Pensions Advisory Service will provide telephone support. Finally, if the saver is looking for an IFA, they are directed towards the Money Advice Service website.

Anyone in such a hurry to access their money that they can not stop and talk to Pension Wise will not listen to scripted warnings from their provider

Understandably, government is concerned that a number of consumers will not bother to follow the steps on the website or take the guidance, particularly if there is a delay or queue to get through the guidance process. So the FCA is using its emergency protocols to rush in new rules for a second line of defence without any consultation. Regulated firms will be required to spell out risk warnings to consumers in simple, direct language, especially where customers have bypassed the free Pension Wise service.

Do they really believe that a consumer who is in such a hurry to access their money that they can not stop and talk to the free and independent Pension Wise service will stop and listen to a selection of government-scripted warnings read out by their provider?

I believe well-meaning employers and trustees can do much better by establishing good quality practices within their pension schemes in the first place that ensure that Pensions Wise’s six steps are already in place. If a scheme is set up to deliver good-quality, well-constructed options to members, then good outcomes are likely to follow.

Here are some potential minimum standards good quality schemes might aim for:

1. For members wanting to take the whole pot as cash:

a. Help with understanding how income tax works, and why spreading over two or three years may reduce the tax bill.

b. A cash fund in which to leave next year’s instalment.

c. Help with appreciating how much income a retired person will need to live on, delivered before the consumer spends all their money.

2. For members wanting to buy an annuity:

a. An explanation that not all insurers are the same, and that an increased lifelong income may be found by shopping around.

b. A simple pension fund statement, containing all the details the customer will need to get an annuity quote from an insurer.

c. A panel of, say, three providers, chosen because their rates are good and they are easy to deal with.

3. For members wanting income drawdown:

a. A default fund that is suitable for pensioners, generating income but with low capital volatility.

b. A suggested rate for regular monthly withdrawals.

c. An option to take further ad-hoc sums easily.

d. Strong ongoing governance, as income drawdown is not a ‘set and forget’ option.

From talking to employers and trustees, my idea of a suggested withdrawal rate is the one that is met with the greatest in-sucking of breath through tightly clenched teeth.

But from talking to ordinary employees, this is the single most useful piece of information to them. And we clearly have a steep information asymmetry here.

Without a suggested withdrawal rate, the consumer faces a dilemma similar to that of Icarus and Daedalus. Fly too high and they will run out of money, but fly too low and they will miss out on enjoying the standard of retirement that their savings would have allowed them.

This brings me to another serious concern. With all the hype around 6 April, the matter is being presented as if it is a single decision – you take your 45 minutes or so with Pension Wise and then make your choice.

No. Only those who cash in their entire pot or buy a standard annuity will have completed the process. For everyone else the initial decision is only the start of a lengthy process involving drawdown, partial withdrawals, fixed-term annuities or purchasing the whizzy, new, flexible products that will be coming to market.

And this is why many employer-based schemes do not want to offer all the flexibilities. They are understandably wary of holding an ongoing responsibility for former employees who retired and left service many years, or even many decades, earlier.

But those employers will want to see their staff go onto to a good-quality product. Perhaps it will be the last thing the employer does – to introduce their pensioners to someone else who can be trusted to cater for their later life financial needs.

Adrian Boulding is pensions strategy director at Legal & General, and chairman of Pension Quality Mark