6 April 2015 will represent a landmark day for pensions. For better or for worse, people at point of retirement will hold their own futures in their hands, with decisions taken at this time having implications that can be felt for many years to come.
It is clear that the rapid speed of change has led to significant challenges ahead for the government and the industry, as well as, most importantly, ordinary consumers. We will need to see a seismic shift in engagement in retirement decision-making if we are to improve prospects of long-term success.
While greater flexibility is welcome, and the reforms could in principle improve retirement outcomes for many people, we need to make sure that there are sufficient safeguards in place to prevent people from making poor choices. From April, the retirement product marketplace is likely to be fiendishly complicated, making it difficult for even financially savvy people to understand the array of charges and other hidden costs, or the long-term implications of decisions made early.
All this will expose people to a wide-ranging array of risks, some more serious than others. In particular, using resources too quickly could lead to people running out of money or paying too much tax, both of which are clearly against the consumers’ interests. Scams are also likely to be a serious problem, and the government must be totally committed to preventing these.
For Age UK the bottom line is that disengaged savers, often with smaller amounts of savings, should get reasonable outcomes throughout their retirement. As employers are now required to automatically enrol savers into workplace pensions, it is vital that their and their employees’ money is not wasted.
This will mean that the government needs to ensure that Pension Wise, the new guidance service, is maximising its reach and providing a service that actually helps everyone; that the industry is developing products that offer good value for customers with low or modest savings; and that the Financial Conduct Authority puts consumers at the heart of the regulatory process.
In addition, the government must report at least annually on the impact the reforms are having – without proper information in the public domain, it could make identifying and helping the losers very difficult and obscure any long-term problems.
In December 2014 we published our eight-point plan, based on the recommendations in our independently written discussion paper ‘Dashboards and Jam-jars’. This plan is aimed at helping modest savers get the most out of the reforms, and making sure that people do not inadvertently jeopardise their future income. The points are:
- Build in tools to help people avoid running out of money or paying too much tax
- Integrate decision-making about state pensions and other benefits
- Set quality standards for drawdown products
- Ensure lenders treat people with small defined contribution pots fairly
- Nominate a strong lead agency to combat scams
- Build in a ‘second line of defence’ for those who do not receive guidance
- Design suitable defaults to reduce the risks of poor, or not making, decisions
- The government must regularly report on the outcome of the reforms
All these, and a continued effort from all stakeholders, are important in ensuring that typical defined contribution savers can get best value from their savings. Anything less is likely to let everyone down.
Christopher Brooks is senior policy manager at Age UK. He tweets @crbrooks222
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