Free, impartial, face-to-face advice is a utopia that any right thinking individual would warmly embrace. But, like many dreams, the implementation of this promise, in the form of Pension Wise shows that the original concept has morphed significantly. It’s hard to see how the scheme will make a meaningful difference to any significant number at retirement, a difficult point in their life.
Behavioural finance suggests individuals are very poor at the sort of high impact decisions they rarely have to make in their lives. Jobs are portable, marriage is no longer a lifelong institution, and even the commitment of having children is made in the assumption (in some cases) that they will be independent by their late teens or early 20s. Retirement for many covers the period between a fixed point in their 60s to the day they die in their 80s, 90s or even 100s.
One foot in the grave
The uncertainty of mortality and lengthening expectation of good health are poorly understood. I deal with successful business people, who are used to dealing with complex concepts and figures, but when they move to reliance on their own resources in their early 60s, they speak of their late 70s as if they have one foot in the grave. The reality is they should consider planning to spend the same level of income now in their 60s and through their 70s. If care is needed, there is a huge risk their income might need to increase in later life.
How this can be explained through simple prose on Pension Wise’s website, or during a brief telephone call, is beyond me.
If we suspend our disbelief and assume that Pension Wise can enlighten many to the options they face, that does not mean they will understand the implications of those choices. There is a widow I have dealt with, whose husband sought advice over the annuity he should purchase. I have seen notes and reports which clearly outline that he would only be providing 50 per cent pension to his widow in the event of his death. Unfortunately he did die, and within nine months of establishing the annuity, the resultant fall in his widow’s income – which would have cost very little to insure at the highest level – meant she had to cut back. The implications were not explained in words he understood.
This subtlety is the reason advice trumps guidance. There is a risk guidance will give a false security. While Pension Wise has said it will signpost routes to advice, its website makes it hard to navigate the options. As an example, why is the FCA register used as the most prominent resource under “getting financial advice”? Click through further and you are lead to the Money Advice Service annuity comparator. This used to be very good, but now feels so complex.
In the maelstrom of coverage over the flexibility and choice, a basic consideration seems to have been overlooked; that for many individuals an annuity is still the most suitable option, and it is just the open market option that is currently broken.