Free pension "advice" won't go far enough

30 July 2014
The new pensions freedom is undoubtedly a good thing. From next April people will no longer have to purchase an annuity. Instead, they will be free to take their funds as a lump sum, use income drawdown, go down the annuity route or adopt a mixture of the above.
Having digested all these reforms, first announced in the March Budget, excitement has now turned to the proposal that people at the point of retirement should benefit from free "guidance" before they make a decision.
The government, having handed people the power to choose how they obtain an income in retirement, clearly (and sensibly) wants to ensure they have some kind of assistance to help them make the best-informed decision.
The question is: what form will the guidance take and will it go far enough? I'm guessing it won't. With greater freedom comes higher risk, so individuals need to be better informed than ever about their choices. But the guidance proposal, still under consultation, is unlikely to offer the breadth of advice and expertise needed by many people.
It is mooted as comprising just a 30-minute session (face-to-face, online or on the phone) and, as the TUC said recently, even half an hour of the best possible advice will not equip people for what could be 30 years of managing their pension pot.
Moreover, while the government was right to state the guidance should be delivered by independent organisations rather than product providers themselves, its choice of the Money Advice Service (MAS) to be one of the guidance organisations has rankled and worried some retirement experts.
There are question marks, for example, over whether the MAS is the right organisation to trust with delivering guidance. As Andrew Tyrie, chairman of the Treasury Committee, said just before we went to press: "It is concerning.The committee has expressed serious concerns about the ability of the MAS to perform its functions and has recommended that an independent review consider whether the MAS should exist at all as a statutory body."
It also seems somewhat unfair that independent financial advisers may need to fund up to 30% of the guidance costs, when they will lose out should consumers ditch proper advice in lieu of the free guidance – which brings me to another problem.
Will the majority of people understand that free guidance isn't the same as proper paid-for financial advice? Most people will need more than 30 minutes to become fully informed about the options open to them. Indeed, many will need the help of a qualified independent financial adviser.
The fear is that these people will make a huge decision about their financial future on the basis of a 30-minute chat that barely scratches the surface of what they need.
Worse, there is a fear that younger people will see the free guidance as a substitute for financial advice and not bother seeking help earlier, when it could make a difference. After all, one costs money and the other is free – it would be a disaster if large numbers of people chose the latter option to their detriment.
If the guidance guarantee kickstarts some kind of flight to advice, great. But I suspect it will end up being a hurried 30-minute chat that only helps those people with tiny pension pots and uncomplicated financial affairs.
So while I'm pleased the government is embracing consumer education about retirement options, there remain two huge red flags: the guidance probably won't go far enough to help many people and it could confuse the public about what is guidance and what is proper financial advice.
The result? There could well be a drop-off in the number of people seeking good, qualified independent financial advice, which, in turn, could lead to people making disastrous decisions about their retirement. Don't be one of them.