Tom McPhail (pictured), Head of Pensions Research at Hargreaves Lansdown on the results of the Treasury Select Committee’s (TSC) budget inquiry, including evidence on the pension changes announced by the Chancellor…
Annuities: Annuity sales are likely to decline, though hopefully market competition will also ensure more people get better value. A lot of people will still want the certainty and simplicity of an annuity. To give just one example, a 67 year old moderate smoker with an average sized pension pot can get an annuity of nearly 7.5%, guaranteed for life (Just Retirement); for most people this would present a more attractive option than the uncertainty of drawdown, or the reckless risk of ploughing all your pension into buy to let property investing.
Retirement Guidance: This is a critical issue and one which is still under intense debate within the industry and with regulators. TSC will undoubtedly flag the guidance as being essential to ensure investors make good decisions with their new-found freedoms. As well as being impartial (no sales process), Hargreaves Lansdown believes it will have to be:
- Recurrent – not just a one off
- Available from a variety of sources in a variety of ways, including face to face and self-service online
- Paid for by the pensions industry from within its existing cost base
- Built around a simple decision-tree style script to ensure consistent outcomes
- Carefully designed to ensure investors are directed to suitable outcomes after the guidance
- As close to mandatory as possible
Suitable hand-offs will have to be built into the guidance process, for example on debt to the Money Advice Service, and for annuity purchase to a whole of market shopping around service. It will be vital to ensure that investors only buy a retirement income from their existing pension provider if that is genuinely a good decision and that they buy the right type of income.
Pre-retirement communications: The TSC failed to consider the vital role that the pre-retirement communications will now play in the retirement journey. The FCA’s old regulations (COBS 19.4, for the anoraks) need to be torn up and replaced with some very carefully designed pre-retirement messages. Investors will need to take a good run up at their retirement decision making and will need to be steered towards good decisions. This will need to start long before the point at which they actually want to take money out of their pensions.
Adapting to the Budget changes: Something else the TSC failed to explore was the implementation of the changes. The pension changes in the budget were a brilliantly kept secret, but because they didn’t consult with anyone on the changes, including the pensions industry, HMRC and the FCA, everyone is now having to deal with the consequences after the event. Many pension providers took years to develop a Flexible Drawdown for their customers (though low cost options do now exist). Similarly just because the Chancellor tells investors that they can take their tax free lump sum and defer doing anything with the rest of the money, it doesn’t necessarily mean that pension companies can actually accommodate such requests when investors ring up and ask to be able to do this.
Taxation of pensions: The TSC is likely to comment on the taxation of pensions, possibly suggesting a move to a more harmonised tax treatment, consistent with other savings products. The taxation of pensions is far from perfect but formulating a fair and effective alternative remains something of a holy grail. This is something which we and others will be looking at over the coming months. For starters we’d like to see the abolition of the Lifetime Allowance, a policy which has now outlived its usefulness.
