The Budget’s pension reforms are a challenge to insurers and an opportunity to asset managers, says Mark Hoban MP
It is a commonly held view that by the time the Chancellor gets up to speak on Budget Day, there is nothing new for him to announce.
George Osborne certainly proved people wrong with his radical reforms to DC pension pots. The reforms come in two stages – the first is a relaxation of the rules on small pots and reducing the minimum income requirement for flexible drawdown.
The second stage is where the radical reforms really start. Buying an annuity is no longer the default option. People retiring with a defined contribution pot now have real choices about what to do with their pension savings.
Why has the Chancellor taken this radical step?
As he made clear in his Budget Speech, he disagrees with the paternalistic approach of deciding how people should use their savings.
This is entirely consistent with one of the first pensions decisions we made in office
Indeed, this is entirely consistent with one of the first pensions decisions we made in office – ending compulsory annuitisation at age 75. When we ended compulsory annuitisation, we introduced constraints on drawdown products that reflected the risk that people could fall back on means tested pensioner benefits if they used up their pension pot.
These concerns fall away with the introduction of the single-tier pension as it is set above the level for most means tested benefits.
So what now?
People will need more support when they make pensions decisions. The chancellor announced that everyone retiring will receive guaranteed guidance.
I think there will be a gap between support offered under the guidance guarantee and full independent financial advice
This should build on the excellent work of the Money Advice Service and The Pensions Advisory Service, but employers and pension providers should play a role too.
But I think there will be a gap between support offered under the guidance guarantee and full independent financial advice. I believe that the industry and the FCA need to develop a framework for simplified advice that can be delivered cost effectively.
The new freedoms present a challenge to insurers and an opportunity for asset managers
The new freedoms present a challenge to insurers and an opportunity for asset managers. We shouldn’t write off annuities, as they insure people against running out of savings. Insurers face a challenge now to demonstrate that annuities can be value for money.
The changes to pensions will be far-reaching.
The challenge for policymakers, employers and the regulators is to empower people to make the best choices and use every pound of pensions savings in the most effective way.
Mark Hoban is MP for Fareham and a former financial secretary to the Treasury