Labour’s shadow secretary for Work and Pensions, Rachel Reeves has decided to bring forward some radical proposals in the pension’s area for inclusion in Labour’s manifesto for next year’s general election. It seems at last that the vital, yet frequently unrecognised, area of pensions is likely to figure prominently in next year’s campaign.
Although most media focus has been on her approach to charge capping, the more vital component, as I see it, is the push to ensure that every retiree gets advice when deciding how to convert their life’s savings into a vehicle to provide income in their old age.
Ms Reeves has announced that a Labour government will ensure that all savers get access to independent pension’s advice to prevent the loss of up to £1bn annually in retirement benefits. This is great news but it’s not clear yet how Labour plan to achieve this. Simply ordering people to take advice takes no account of how they are going to pay for it and given that the average pension pot is less than £50,000, few people are going to warm to the thought of having to pay advice fees out of it.
My own view is that the only way to ensure that advice is taken at retirement is to provide advice ‘vouchers’ that would entitle the retiree to a holistic financial health check (see blogs passim below*). Either the government or the pension company holding the funds could supply this voucher. If this was sent as part of the retirement notification package, and decumulation products could only be supplied to people who had used the voucher, then we could eliminate the danger of retirees making decisions that affect the remainder of their lives without the knowledge to fully understand the options available.
Half-hearted efforts to encourage people to take advice via media campaigns and notices are useless as they tend to be most effective on those who are already financially literate. To reach the huge new market of pension savers whose small pots won’t lend themselves to purchasing advice means that more drastic options must be taken.
As for the cost, well the vouchers could just cover the cost of a basic financial health check as most of those who have small pension pots have relatively simple finances. Those whose financial affairs are more complex are more likely to have the money to add to the voucher for a longer session. And given that by Ms Reeves’ own figures nearly £1bn per year is being lost through poor retirement choices, this could be a cost effective way to ensure more of their money goes back to the pensioners and less state support is required.
So come on, Ms Reeves. Having identified the problem clearly, you need to go the whole hog and commit your party to sorting the problem out by paying for the advice needed, rather than futilely trying to encourage the pensioners to pay for it themselves.
* Blogs that previously referenced the proposed voucher system:
Pension Reform Part II (Life and Pension Moneyfacts March 2013)
The conundrum of Simplified Advice (Life and Pension Moneyfacts April 2012)
Retirement advice – a necessity, not an option (Exaxe September 2013)
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