Pensions freedoms have left members baffled, so financial advice is more important than ever, says Sara Benwell
We have a serious retirement problem. Freedom and choice has given ordinary savers ultimate control over their financial destiny, but as with anything in life, the more choices there are – the easier it is to get things wrong.
And for people who do take the wrong path, the consequences can be severe. Savers could find themselves handing the results of a lifetime saving to a scammer, taking entire pots as cash and landing a massive and unnecessary tax bill or simply running out of money too early.
There is evidence people are falling into some of these traps already. In the twelve months after the new rules came into force, HM Treasury received £200m more tax than it had planned for, as people rushed to exercise their new freedoms and were hit with a bigger tax bill than expected.
There is evidence people are falling into some of these traps already”
Meanwhile, in a study carried out by MetLife, 87% of IFAs questioned said they were worried that increased flexibility over pension funds was leading to savers making mistakes.
One obvious solution is financial advice. Whilst the initial expense may seem off-putting to savers, the rewards can be rich. Research last year from IFA website Unbiased.co.uk showed that taking financial advice on savings adds £48,279 to a retirement pot on average.
Unfortunately, the statistics continue to show that people are spurning advice. LV=’s annual State of Retirement report found that people are turning to their nearest and dearest for help with their finances, rather than professionals.
The report found that 60 per cent of existing pensioners took financial help from non-professional sources – such as friends and family – and three quarters of those approaching retirement planned to do the same.
The report found that 60 per cent of existing pensioners took financial help from non-professional sources”
Only a quarter of over 50s have taken, or plan to take, professional advice about their retirement, despite 45% saying the reforms were too difficult to understand without it.
And while a quarter of people do seek advice, many of these go on to disregard the advice they have been given. The MetLife study found that 22% of advisers were not comfortable with customers choosing not to follow their recommendations since pension freedoms increased flexibility over pension funds.
For pension scheme managers, the picture is worrying, particularly when many are unsure of what to do when it comes to helping people choose between retirement products.
And there is an important role here for schemes. It is already clear that people do not yet understand the value that advice could add to their savings, or the risks of getting things wrong. Education is crucial, particularly for any schemes that are offering, or pointing members towards drawdown products.
For pension scheme managers, the picture is worrying”
Of course, schemes and employers can (and sometimes do) go further. Some schemes offer and pay for advice in-house. Many employers also work with financial education providers to improve bring employees’ knowledge and understanding, and some also pay for advice to help them make the right choices.
Of course, not every scheme or employer will be willing or able to pay for full financial advice. And in some cases, robo-advice might offer a middle way. The People’s Pension is working with LV= to offer advice to members for £49 a person.
While questions remain about how far fiduciary duties extend into retirement, no one wants to see savers get hurt. Not least because it would only further damage the reputation of the pensions industry. Schemes need to help people understand why advice might be a good step for them, and warn of the risks of staggering blindfolded into their retirement years.