Free pension guidance will be independent
Guidance to accompany the new pension rules outlined in the March Budget is to be delivered by independent organisations rather than pension providers, the Treasury has announced.
Those reaching pension age will be able to seek free guidance through a "broad range of channels" that will include face-to-face, online and phone support from the Pensions Advisory Service (TPAS) and the Money Advice Service (MAS), as well as other organisations soon to be confirmed.
From next April, 18 million people will benefit from far greater flexibility with their pension options, including no longer having to purchase an annuity. At the same time, some 300,000 people a year with defined contribution pensions will be able to access their savings whenever they choose after turning 55.
Chancellor George Osborne said: "It's right to support hard-working people that have taken the long-term decision to save for their future and I'm pleased that the responses we had to our proposals on making pensions more flexible have been overwhelmingly positive.
"We're making sure that people have the right support to make their own choice about how best to finance their retirement and I'm pleased to confirm that everyone with defined contribution pension savings reaching pension age will get free and impartial guidance on their range of available choices at retirement."
The cost of providing free guidance to pension savers will be covered by a levy on financial services companies regulated by the Financial Conduct Authority (FCA).
Caroline Rookes, chief executive of the Money Advice Service, said: “We are pleased to have this opportunity to build on our existing work helping people as they approach retirement and with wider money issues. Planning for retirement is a crucial life stage, and it is important that people feel well-informed and confident in the decisions they make.”
Which? executive director, Richard Lloyd, added: "It's essential that people facing retirement get personalised, impartial support to navigate some of the most radical changes to the pensions market in decades, so it is absolutely right to separate this from sales processes. This decision will help avoid potential conflicts of interest when guidance is given, and will mean consumers are more likely to trust the information they get and make the right decisions.
"It's now for the regulator to establish the highest possible standards for both the pensions industry and those who will provide the guidance, so that people get better value for money out of their hard-earned pensions savings."
However, Kate Turner, head of advice policy at wealth adviser Towry, commented: “It’s vital that retirement funds aren’t just frittered away – everyone should have some form of long term financial plan in place. This needs to be tailored to each person’s specific goals and ambitions, so individual personal financial advice is essential, especially given the large number of options available to those approaching retirement. This advice will often need to go beyond the level of detail provided by the likes of the Money Advice Service and the Pensions Advisory Service.”
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.
In exchange for any lump sum – usually your pension fund – an annuity is “bought” from an insurance company and provides an income for life. When you die, the income stops. Annuity rates fluctuate daily and depend on your sex (although from 21 December 2012 insurers will no longer be able to use gender as a factor when calculating annuities), age, health and a number of other factors, so you have to pick the right one and, once bought, its terms cannot be altered, so seek financial advice.