“In the land of the blind, the one-eyed man is King.”
This would appear to be a fitting metaphor for the pensions sector at the minute, as the dust gradually clears after the explosion of new freedoms in the pensions business.
Most are still unable to see what dangers lie ahead or are already near; others have one eye open and are gaining some clarity on where we stand, just over two months after pensions ‘D-day’ this spring.
At the risk of going blue in the face, let me quickly recap yet again on the new pension rules that came into effect in April.
Now pension savers are free to draw down and use their pension savings as they wish: as a lump sum, in a series of smaller sums, to invest in other ways, or in the hitherto traditional way: buying a pensions annuity to provide a monthly income for the rest of their life.
Now we have had the first update from the Chancellor on how quickly savers have rushed to embrace these new freedoms, in the first weeks since then.
Last Tuesday, George Osborne told the House of Commons that savers have already withdrawn more than £1bn from their pension pots, with 60,000 people utilising the new flexibilities in the weeks since they became available.
He added this: “We have to make sure that people get the best advice, that the market responds and that companies up their game in helping customers make use of these freedoms. We will be watching these things very carefully.”
This rather cryptic comment was a reference to one of the teething problems that have emerged in connection with the new world of pension saving.
A little digging into the background revealed that not all pension companies have been willing or able to fully implement the new rules. Osborne was issuing a warning to providers who are not allowing their customers full access to the freedoms.
Work and Pensions Secretary Iain Duncan Smith was much clearer in his ‘Telegraph’ newspaper column: “Two months into the reforms, we are watching the market closely. I know the pensions industry is working on the design of new and innovative drawdown products and many providers have stepped up to the plate and are already offering their customers flexibility - but I am concerned when I hear that some firms still appear to be dragging their feet.
“I have a message for those firms: it is your responsibility to sort this out, and look after your customers. After all, you are holding their money – not your own.”
Duncan Smith said that both he and pensions minister Ros Altmann would not hesitate to take action, possibly even ‘name and shame’ those companies putting barriers in the way of people getting access to their money.
Now there’s nothing untoward about this at the moment, in that the new flexibilities are ‘rules’ as opposed to ‘laws’. Providers are not compelled to offer full pension freedoms. The ‘pre-changes’ range of pensions products and computer systems mean some firms genuinely need time to invest, upgrade, and generally attain a position where they can offer partial access to pension pots.
The case that sparked this situation was Friends Life, which is not yet geared up to give customers flexi-access drawdown and staged withdrawal of pension savings using UFPLS (uncrystallised funds pension lump sums) – what we called in a recent column ‘Ufflepuffs’.
Industry observers have been commenting that it is only natural that some companies might choose not to implement the new freedoms fully, out of a quite reasonable concern that their clients run the risk of bad decision-making which could leave them impoverished later in their lives.
They are concerned over the self-control of pension savers, in the same way that parents worry when their children spend their allowance on six lollipops on Monday, and may have no lollipops left on Friday.
One observer commented that being ‘named and shamed’ for failing to enable savers to fully access their savings could be interpreted as a healthy concern that your customers be discouraged from ‘going broke’. He added that this threat to name and shame is like a government introducing a bill to legalise euthanasia, and then threatening doctors who refuse to kill their patients!
Amidst all of this, the word ‘advice’ is emerging as the key way of safeguarding your financial wellbeing. From basic and general guidance through the government-sponsored ‘Pension Wise’ service, to higher-level, personalised advice from professional, independent financial advisers, a number of sources are now available to ensure that you, as a pension saver, are not damaged by rushing headlong into decisions you might later regret.
In the land of the blind, it could be your financial adviser who is king!
:: Michael Kennedy is an independent financial adviser and pensions specialist and can be contacted on 028 7188 6005
