Morningstar's "Perspectives" series features investment insights from third-party contributors. Here, Tony Stenning, Savings and Investment Expert at BlackRock, comments on Pensions Freedoms four months on.
It is four months since the new pension freedoms came into force. For the time being, many retirees are sitting tight, waiting to see how the new rules will bed down before committing to any wholesale changes in their financial plans.
However, two clear issues have emerged since the new freedoms have been established: The first is that many people still do not feel equipped to make the right decisions, and secondly, that a ‘free’ market for products does not yet exist.
A recent survey by consultancy group PwC showed that only 36% of pension holders said they’d received any information or guidance from their providers ahead of the new rules that came in on April 6.
This is a particular concern for those with smaller pension assets: only one in four of people with lower wealth – defined as those with total assets of less that £300,000 – or a smaller pension pot of less than £40,000, say they’ve received any information or guidance.
It is also clear that retirees are increasingly vulnerable to scams. KPMG recently warned that retirees would be targeted by ‘flavour of the month’ investment scams, which offered big rewards in return for an individual’s pension pot.
With interest rates at historic lows, retirees can be seduced by the prospect of higher returns on their savings. Education will be the long-term key to ensuring that they do not accidentally give away their savings to fraudsters. In the shorter-term people should bear in mind the old adage that if something sounds too good to be true then there is every likelihood that it is, and people should seek help before handing over their hard earned savings.
Closing the Pensions Gap
Retirees and the Government are taking steps to address this knowledge gap. The PwC survey found that more than 51% would be willing to pay for advice, suggesting that consumers recognise the importance of the decision they are making.
Also, the Government is taking steps to ensure that non-advised retirees have some of the tools to ensure that they can make appropriate decisions about their long term wealth.
Employers are also taking steps to ensure that their employees are well-informed about the opportunities and risks of the new rules.
Nevertheless, the industry needs to do more to ensure that people do not make life-changing choices without proper consideration of their options.
BlackRock’s 2014 Investor Pulse survey revealed 28% of people aged 55–74 didn’t know where they were going to put their retirement savings after April 2015. It will be interesting to see how that figured has changed in the 2015 edition of Investor Pulse.
A Free Market for New Freedoms
It is also clear that there is not yet a fully free market in place for pension transfers. While annuities will still be the right option for many people, there are those for whom switching may be appropriate and investors have reported problems when they have tried to switch out. This goes against the spirit of the new rules.
Investors need to be free to make the right decisions based on their personal circumstances rather than having to negotiate draconian exit fees, or battle bureaucracy. As an industry, we must work to ensure that those saving for retirement have access to the flexibility intended by the new rules.
It is worth adding that the Chancellor may not be finished with his reforms yet. In the recent budget he launched a Green Paper to look at the pensions’ system as a whole.
As part of this, he will consider whether pensions should look more like ISAs. This would be another overhaul for retirees and their advisers, and many have suggested that the industry needs a period of consolidation to allow for proper planning. Either way, our central thesis still stands: a truly ‘free’ market and better tools for decision-making are vital in helping retirees use the new freedoms for effective retirement planning.
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