A national retirement advice service could be delivered at a tiny cost to pension pots
Mick McAteer is right to be concerned that many people may make poor choices with the new pension freedoms but misses out many aspects when saying that lower paid workers will suffer more than most.
Lower paid people will naturally have smaller pension pots and rely much more on the state pension for their total income. The Financial Conduct Authority (FCA) annuity study showed that more people with smaller pots did not shop around for an annuity. They would have to make some really terrible decisions to get poorer value than they were being offered pre-budget.
Lower paid people also tend to have poorer health making an annuity less valuable for them. Often they would have to survive for over 20 years just to get their own money back which fewer than half are likely to do.
Now people reaching pension age today could use the new rules to spend their private pension over a short period whilst deferring their state pension.
Someone with a state pension of £7,000 a year and a private pension fund of £40,000 can buy an inflation-linked annuity of £1,400 a year giving £8,400 in total. By deferring state pension for four years and running the private pension down, a lifetime inflation-linked income of £9,800 can be achieved. This gives double the best priced annuity.
The terms for deferring state pension are going to be reduced for those reaching state pension age after April 2016. So this level of generosity will not be available to those retiring after then, but even on the expected new rates it will prove a better option for many people than buying a single life annuity.
Many may enjoy having a relatively large amount of money for them to spend early in their retirement
Lower paid people tend to have more debt – often high interest rate debt – which they can use the new pension rules to remove.
Also, many may enjoy having a relatively large amount of money for them to spend early in their retirement rather than having a small amount added to their income over the rest of their life time.
Advised correctly, lower paid people have much to gain from these new freedoms.
A national retirement advice service provided by the private sector could be delivered for around 50p a week
The wrong approach is being taken to guidance though, with no effort being spared to remove private sector financial advice services from the landscape. A national retirement advice service provided by the private sector could be delivered for around a 50p a week deduction to people’s retirement income for someone with say a £20,000 pot.
The annual cost of this service would be less than the total commission paid by people buying annuities. In short it would cost the consumer no more than they are already paying now and could deliver demonstrably better outcomes.
One area that is bound to increase is fraud
A stronger case could be made for saying that “Middle England” savers of £70-120,000 will be worse off as they will no longer have lots of lower paid, shorter living people subsidising their annuity rates. But our annuity rates are so poor, partly caused by a higher level of financial health and safety regulations, that it is far from clear that encouraging these people to consider drawdown is such a bad thing.
One area that is bound to increase is fraud. We must all play our part in being more vigilant.
Alan Higham is head of retirement insight at Fidelity