Retirees need more help with pension freedoms, says review
Retirees will need more support with their financial planning if the pension freedoms are to be successful, according to a new report from the Independent Review of Retirement Income.
The review says retirees will need help making sure their pots last for life and to allow them to enjoy the benefits and opportunities created by last April’s reforms.
It adds that currently, retirees are subject to risks that they may not understand and cannot be expected to manage themselves.
The most significant challenge the report seeks to tackle is how to get pension savers engaged with financial planning at retirement, when initiatives such as auto-enrolment are predicated on inertia from employees who may not get actively involved in deciding how their money is invested, or invest more than the minimum contribution levels.
‘Default process needed when people retire’
One possible solution according to report, is the development of a ‘default decumulation process’, which would ensure savers who do not want to, or cannot make informed decisions when they finish work, can drift into a suitable retirement income product.
The review says: “One of our key recommendations is that a ‘safe harbour retirement income plan’ is introduced. This would involve a simple decision tree with a limited set of pathways. This would allow people to get the best combination of retirement income products for them, given their assets, liabilities, health status, family circumstances, tax position and risk appetite.”
The plan would also feature longevity insurance, to prevent retirees running out of money before they die and could be set up by an individual following ‘a guidance or advice surgery’.
In addition to a default strategy at retirement, the review also proposes the creation of an independent Pensions, Care and Savings Commission to ensure cross-party consensus on the future of UK pension policy.
“Making decisions about retirement income are the hardest decisions people ever have to make, because the risks of pensions are so poorly understood. Getting it right requires a national narrative about what pensions are for. Everyone in parliament – whatever their political affiliation- and industry has to sign up to this narrative – just as they did with auto-enrolment.”
‘Pensions are precious’
Professor David Blake, chair of the IRRI and director of the Pensions Institute at Cass Business School says: “A great deal of effort will now have to into re-establishing what a good pension scheme is. This will need a commonly agreed national narrative.
“Without this, people’s aversion to annuitisation combined with their willingness to pay highly for both flexibility and guarantees could leave them worse off than if they purchased an annuity to begin with.”
This is a significant challenge. But it is one that is well worth the effort, because as the pensions minister, Ros Altmann says: “pensions are precious”.
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.