The pension freedoms mean you have much more choice about what you do with your pension when you retire. But it also means more confusion and – for some – the risk of being ripped off by scammers. Should you be pushed in the direction of free guidance?
Earlier today I chaired a debate, organised by retirement company Just Retirement. The subject was ‘default guidance’. If that doesn’t mean much to you, let me explain. It’s the notion that, when you retire, if you have a pension that’s a pension ‘pot’ type (rather than a final salary pension), you’ll be pushed in the direction of free pensions guidance, provided by Pension Wise, before you can do anything with your money.
The current system
April 2015 saw the introduction of ‘pension freedoms’ which meant that people who have a pension that’s not salary related (so, broadly, not those in final salary pensions) can take money out of their pension when they retire, leave it where it is or use it to buy a product that will generate an income. Before these reforms most people were effectively pushed into buying an annuity.
As part of these reforms, the government set up something called Pension Wise, which is designed to provide free ‘guidance’ rather than full financial advice.
- Pension Wise is supposed to be help people make sense of the choices they’re now faced with at retirement (you can read more about this in my article called What is Pension Wise and how does it work?). You can access Pension Wise online, via a phone appointment or face-to-face (although not many locations are set up for face-to-face meetings).
- Pension Wise is not there to recommend products but to, for example, point out the tax consequences of taking a large chunk of money out of your pension in one go.
SAVVY TIP: You can read more about the tax consequences of taking money out of your pension in my article called How to reduce your tax bill when you take money out of your pension
How are people told about Pension Wise?
There are three different ways people may find out about Pension Wise:
- Some people may find out about Pension Wise online, via newspapers or other media.
- Those who are approaching retirement and who have a pension ‘pot’ type of pension, will get a ‘wake up pack’ – which is basically a lengthy and wordy letter – explaining that there are different things they can do with their money. In it, they’re also told about Pension Wise.
- Those who contact their pension provider to take money out of their pension may be referred to Pension Wise.
What’s the problem?
The problem is that most people don’t use Pension Wise and many aren’t aware of it. Research puts the figure of the number of people who get some help from Pension Wise as between one in ten and one in five of those who could use it.
However, those who do use it seem to find it useful. Pension Wise’s own measure of ‘customer satisfaction’ gives it a rating of 89%. But with many people either unaware of Pension Wise or not convinced it’s going to be useful or relevant to them, it seems like something should be done to push more people in its direction. I use the word ‘push’ deliberately, because I’m not convinced that increasing awareness of Pension Wise on its own is the answer, and I’m not alone in that thought. A number of organisations and pensions companies (including Just Retirement, which hosted the debate) believe it’s a better option than the current system.
What would default guidance mean?
The default guidance wouldn’t in any way mean that people who were facing retirement would be forced into a certain course of action (i.e. to leave their pension money where it was, buy an annuity or take the whole lot out). The whole point is that it’s supposed to make people aware of the options.
It can also help protect against the risk of being scammed and, if we know of one group of people who’ve been very active in the run-up to the pension changes last April, and in the months since, it’s pension fraudsters and scammers.
The idea is that instead of sending out a lengthy letter explaining the options, people would get a short (maybe one page) letter directing them to Pension Wise. Or, if they ring their pension company, perhaps their pension provider could give them Pension Wise’s contact details or – even – transfer their call directly to Pension Wise.
Some changes are being planned anyway. They include a rejig of the Pensions Advisory Service, Money Advice Service and Pension Wise so that there’s one organisation (accountable to government but paid for by financial services companies) providing free guidance for people about pensions. It may be called Pension Wise or something completely different.
FULL DISCLOSURE: Although I was paid to chair the roundtable discussion about default guidance, I’ve not been paid to tweet about it or to write this article. I’ve written it because I genuinely think it’s an interesting subject. I’d be interested to get your feedback – especially if you’ve been through the ‘pensions freedom’ process.
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