Graeme Yorston

8 April 2015

Pension reforms must be managed correctly

The Chancellor’s pensions shake-ups must go hand-in-hand with robust consumer protection measures to support those who need it, says Graeme Yorston, Group Chief Executive, Principality Building Society.

One of the most widely talked-about announcements in March’s budget was George Osborne’s announcement that, from 2016, so called ‘pension freedoms’ are to be extended to people who have already bought an annuity.

In recent years, the value of annuities has become debatable. Low interest rates and the fact that, when a pensioner dies, their annuity dies with them, have further compounded this unpopularity.

In moves to counter this, last year’s budget included far-reaching reforms to pension freedoms. These changes allowed people to access their pension savings and fund their retirements as they saw fit. At the time, it was lauded as a radical move that effectively meant that the requirement to buy an annuity had been axed. 
These changes to the rules were welcomed by many, but were of little comfort to pensioners who already found themselves locked in with a poor value annuity or a policy that no longer suited their circumstances. For these pensioners, exiting an annuity was a costly move; the only way they could do so was by paying a tax charge of at least 55%.

Given these drawbacks, it would have been music to the ears of a further five million pensioners last month that the restrictions on buying and selling policies will be removed entirely from April 2016.

But despite appearing like a bold move on the surface, the move has caused many, including ourselves, to express concerns about consumer protection. In many ways, empowering consumers is a good thing to do. The Chancellor’s was right when he said that people who’ve worked hard and saved their lives should be trusted with their own pensions. There’s no doubt that there will be some who would welcome being able to draw on that money as they choose. 

But for many pensioners, annuities will still be the best option and, if not managed correctly, the reforms could lead people into financial difficulty, resulting in a slippery slope which doesn’t take into account personal circumstance. Aside this, and the fact that there’s no certainty on how the market for selling annuities will work, no detail was given by the Chancellor on the measures that will be taken to provide pensioners with appropriate advice and guidance to make informed choices on their options.

The Government has launched the free Pension Wise to accompany the pension freedom reforms announced last year. This will support over 55s who want to take advantage of pension reforms from April 6, allowing them to take control of their entire retirement savings and spend, save or invest them as they wish.
But advice on a further proposed change - allowing those with annuities to sell the income for a cash lump sum - will not be given.

It is also reported that Pension Wise will give general guidance but not personalised advice - for that, people will still have to pay a financial adviser.

As these changes will affect a significant number of people in society, adequate support processes must be implemented to ensure that pensioners have access to high-quality advice to enable them to make educated choices on their financial affairs. 

Unfortunately, news just this week that an investigation has been launched into claims that the details of millions of people's pensions are being sold to fraudsters and cold-calling firms shows that these concerns are justified.

The Chancellor has implied that further guidance and advice will be developed. This will be absolutely crucial to protect pensioners, some of whom may be vulnerable and may not be prepared for or understand the investment decisions they now need to take for what could be a life-changing decision. While it remains to be seen whether the proposals will actually get off the ground following the General Election, there can be no complacency when it comes to providing adequate support and controls to those that need it.

Published: 08/04/2015