As we reach the end of 2014, it has become clear that the Pension Reform announced last March by the Chancellor George Osborne is here to stay. It is universally popular with retirees and no potential government can hope to get in without promising to maintain it. Only time will tell if it will lead to problems further down the road. As it stands, the people have welcomed the opportunity to take charge of their own financial affairs in retirement and will dismiss anyone who lectures them on their inability to manage their own money.
The opposition has threatened to review the rules around the pension reform if they get power in May. The OECD has also weighed in with a warning in its latest report, OECD Pensions Outlook 2014, that “…it could be detrimental to both retirement-income adequacy and incentives to work, due to individuals’ myopic behavior and insufficient financial literacy”. That may be true but the general tone of these criticisms is a hectoring one and grown adults who have earned the money over their lifetime might not take kindly to being treated like children.
That’s not to say that the opposition and OECD do not have a point. It is very difficult for people to manage their money across a lifespan when they may not be used to the complexity of financial products and hence, they will be vulnerable to those who wish to bamboozle and scam them. Nevertheless, they are grown adults and are not likely to give up this freedom to control their own financial destiny so the emphasis of the politicians, regulators and commentators should focus on two specific areas – regulation and education.
The area of regulation is vital to protect retirees against those who view the arrival of a completely new range of relatively inexperienced financial investors, with access to significant lump sums, as an opportunity to promote complex high-risk products with excessive benefits and very big ‘small-print’ risks. Only tight regulation of the financial market will ensure that individuals will be protected from the outright scammers. It is easy to say that people can look after their own money but we only have to look at the large numbers who have fallen victim to the ‘pensions liberation’ industry already to realise that this could become a big problem.
The one true protection is financial awareness. To this end, industry bodies should work with government bodies to increase the financial literacy of the nation. Steps are underway to formalise the teaching of financial literacy at school stages but while this is a good first step, even those receiving the education will need access to educational opportunities across their lifetime as whatever they learn now will certainly be of limited value when they come to retire.
The government and financial services sector should therefore set about building an environment which promotes life-long learning about financial matters which could be accessible by all people at different stages of their life, in order to optimise the accumulation and decumulation of their wealth. In a world where a financial scam email to empty your bank account is just a few clicks away, financial education should be one of the industry’s biggest priorities.
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