The arrival of pensions freedoms has left the insurance companies with a big concern. It is the risk that they would be held responsible if retirees released their pension savings and used it to buy unsuitable products in an unadvised scenario. Would the providers be in danger of being held ultimately responsible just because it is their product that the customer chose to purchase?
One option to mitigate against this would be to insist on advice, but post the Retail Distribution Review, the cost of advice has become explicit and many people are choosing to avoid it as they are reluctant to spend c. £500 out of an average pension pot of £30K to be told how to spend it. “We have to get away from this patronising view that the state knows best how people should spend their own money” was the cry of those in favour of introducing pension freedoms and this mantra has been taken to heart by those just about to retire. They want to make their own decisions and can’t see why they should pay for the expertise of the adviser community.
The Financial Conduct Authority’s recent survey show that 1 million pensions pots have been accessed since the introduction of the freedoms and 55% of those had been completely drained. They also stated that accessing one’s pension before the age of 65 as allowed by the Pension Freedom legislation had become the new norm. This doesn’t mean that all the retirees have squandered it. In fact, a very high percentage have put it into other investment vehicles. The problem is that many have chosen the type of high-risk investments that may well be unsuitable for those who are trying to make a pension pot last for the remainder of their lifetime.
As part of the overall solution to the lack of advice for those making retirement decisions, the idea of a pensions dashboard was born. Currently under development by a number of providers and tech companies under the supervision of the Association of British Insurers, the idea is that all pensions information, including information about an individual’s state pension entitlements would be brought together so that the retiree could have all the facts prior to making their decision.
A good idea, but it ignores the key point is that having all the correct information doesn’t automatically lead to a good decision. The knowledge of what is the right thing to do with the money for a particular individual is not automatically there just because the individual has the information upon which to base the decision.
It comes down fundamentally to the difference between information and knowledge. Ultimately, the Pension Dashboard will manage to amalgamate much data and use it to provide significant and useful information to the end user. However, unless one has the training and ability to put that information to use, it remains just a collection of datasets that stand-alone and could confuse the retiree, thereby hindering them from making the best decision.
Information does not equal knowledge. So, the Pensions Dashboard is certainly providing the basis for people to make an informed decision about their future pension savings. The question is do they have the necessary experience to understand the import of the information given in order to be able to make a knowledgeable decision?
This is where the expertise of the adviser or financial services professional comes to the fore. It is not possible for the majority of people to have sufficient knowledge of the arcane workings of the financial services sector to really put this information to work. For example, it has been proved over and over again that the majority of people underestimate both their needs and their longevity, so how can they best match their needs to the product set available if they can’t reasonably define those needs.
There are a huge variety of products available but the would-be retiree would not have the time to make a thorough assessment of them, even if they had the ability to do so. Similarly, the same can be said for their ability to work through their own personal financial position in order to come to a true realisation of their needs. Without that, finding the right product is more a matter of guesswork than true decision making and is likely to lead to a situation whereby many people will look back in a few years’ time and realise that they squandered their last chance to ease their retirement by blowing the last major input of cash that they had coming to them.
The Pensions Dashboard is a good start but a lot more needs to be done to provide a full answer to the issue of helping people to make the right decision about their pensions.