All of sudden, people will have the flexibility to do what they believe is best for themselves – rather than being pushed down a particular path or prevented from accessing their own money. These measures mean more choice and genuine flexibility for millions of people planning for their retirement.
Of course, after so many decades of tight control, many are shocked at the prospect of abolishing restrictions and freeing up the public’s options. There are those who express concerns that people cannot be trusted to make sensible decisions, that they will just fritter their money away and then fall back on the state. Perhaps some will, but the vast majority will not.
The reforms are long overdue, though in fact many of them have already happened – just not for the majority of pensioners. The flexibility being granted to all pension savings already exists for the better off. Those with the largest pension funds, or who already have good pension income, have been allowed to access their funds and choose how to invest or spend their pension savings for the past couple of years. Large fund-holders have been able to avoid buying an annuity by using income drawdown for some time. Quite rightly, the government has now extended that freedom to all.
We should look beyond nanny state notions of what people can be allowed to do. Of course, receiving advice on what options there are and how best to invest will be crucial, but that should have been introduced long ago.
If we look to the example of Australia – where there has not been any mandatory annuity requirement and people have had the ability to spend all their fund – the general finding is that people are sensible with their money, using it to enhance their retirement. Some years ago, there were examples of people spending all their pension fund early on, but that is now very much the minority. The pensions industry there has developed new products to help people manage their money in retirement. The same can happen here.
People who have been responsible enough to save for their retirement should be trusted to be responsible enough to use it for themselves in retirement. The days of people feeling forced into buying poor value annuities could be over. Annuities may be right for some, but we need to be offered real choice about how to use our pension savings. Currently, everyone who buys an annuity pays a fee or percentage of their pension fund when they transact. That money could have funded advice, but was not required to. In future, the money spent on fees and commissions just for buying the product can be used, together with extra from the government and industry, to fund specialist basic at-retirement advice to help people understand their options. The regulator needs to oversee this carefully.
For far too long, pension companies have had a captive market, and have failed to offer fair value to their annuity customers. With the drop in interest rates in recent years, the income people receive has fallen sharply. Standard annuities are a one-size-fits-all product – with no chance to change if rates go up again, if market circumstances change, if new products come along, or if your health deteriorates. Some people will benefit from the certainty of an income stream (even if modest), but it is unlikely that most would choose to use all their pension money to buy just one product which fails to address many of the retirement risks pensioners face.
These changes are welcome and will allow the pensions industry to develop better products that can suit different types of individual and give them genuine choice. New products – like pension income funds – can be developed, as a follow on to pension growth funds.
The pensioner bonds could be a part of this. But other products offering guarantees of some kind, or making some insurance provision for later life care needs – as well as enhanced income drawdown products – will finally give the mass market the freedom and choice currently only available to the wealthiest.
The new pension regime makes pensions far more attractive, and should help restore a culture of long-term saving. The challenge now is to ensure people can access affordable advice that is impartial, independent and not driven by product sales – as well as facilitating new products that are more flexible and adaptable to modern life. I believe we can and must rise to this challenge.
Dr Ros Altmann is a pensions expert and former government adviser.