The apocryphal Chinese curse, “May you live in interesting times” was quoted by Robert Kennedy in his famous “Day of Affirmation” speech . In it he stated that although interesting times were times of danger and uncertainty, they were generally the most creative times.
Few would have believed this time last year that we stood upon the cusp of such “interesting times” in the pensions’ world. Before Christmas 2013, companies operating in the pension sector in the UK were pressing forward with clear strategies completely oblivious to the fact that they would be up-ended by the Chancellor in his budget statement on March 26th. Since then, the industry has struggled to define what exactly will be the outcome once the dust has settled on the Chancellors stringent reforms. Industry analysts have been burning the midnight oil as they try to second-guess the changes in the retiree behaviours once they get full control of their pension savings in 2015.
Many forecasts have been brought forth, extolling or critiquing the changes according to the taste of the author. Either the UK is headed for a Nirvana of post-modern capitalism where retirees will successfully manage their finances to cover their own longevity risk or we will be heading for a “Spend, Spend, Spend” scenario where pensioners will run amok with the money and end up reliant on the state after a couple of years.
How exactly this will play out is impossible to know for certain. Yet what we can be sure of is that there will be a rapid burst of creativity. New financial products and other investment opportunities will be aimed at this segment of the market. The range of companies involved in the retirement market, previously a small and specialised pool, will be much broader and provide a far wider set of opportunities and risks for retirees. We can therefore expect the market options to be far more varied and sophisticated, requiring a good understanding of the issues involved by the prospective retirees if they are to maximise the financial security of their retirement.
The other big catalyst of change will be the launch of the new guidance service that will provide face-to-face guidance through the Citizen’s Advice Bureau and telephonic guidance through The Pensions Advisory Service. This guidance service will be vitally important to those who are faced with the likely dizzying array of financial opportunities that will be put before them. With over 600,000 people hitting the state pension age each year for the next 5 years and the average pension pot being c. £40,000, the total amount ‘up for grabs’ will be well over £120 billion across that 5 year period.
Much of this money will still go into annuities and into existing style drawdown products but a market that size will attract a large number of new entrants, both legitimate and scammers. The extent to which these succeed will be a key factor in determining the success of the changes and it seems likely that further market regulation will be needed to ensure that savers are protected from the complexity of financial products.
One thing is certain, we live in interesting times and there is no sign of them becoming boring in the year ahead.
What do you think? Let us know in the comments below!
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Photo Credit: "Robert F. Kennedy 1964" by LBJ Library photo by Yoichi R. Okamoto - http://lbjlibrary.org/collections/photo-archive/photolab-detail.html?id=1472.
Licensed under Public Domain via Wikimedia Commons.