Even the Bank of England’s chief economist, Andy Haldane, admits to “not being able to make the remotest sense of pensions”. So what chance has everybody else? Many people find pensions and saving for retirement confusing and worrying. A substantial minority have such low levels of financial capability, adult numeracy and literacy as to seriously affect their life chances.
Yet this is a time when 5.4m UK workers have been enrolled into new workplace pensions in 2012-15 thanks to government pension policy, with another 3.6m due to be enrolled by 2018. These are new savers who did not previously have a pension provision. It is expected to result in an extra £14 billion to £16bn in savings per year by 2019-20, which will help offset the problem that people in the UK are saving far too little for retirement.
But most of these savings are in defined contribution private pension “pots”. Unlike with final salary schemes, there is no guaranteed sum at the end. It means individuals have to monitor and assess their pension’s performance and make investment decisions at retirement (if not before).
The old system where people used their lump sums to buy an annuity on retirement to secure an annual income is meanwhile in decline. Annuity rates have been falling for years because people are living longer, and this has been exacerbated by the vote for Brexit. The decline has made it more and more expensive for retirees to buy annuities that pay the same regular income.
Following the pension freedoms introduced in 2015, people may now be tempted to avoid annuities and either take their whole pension pot in cash at retirement or leave it invested in their pension fund and dip in as necessary. Again, this makes it more complicated to make the most of what they have.
Help at hand?
The upshot is that access to expert financial advice has become more important for ensuring good retirement outcomes. A package of reforms in 2012 were designed to improve advice by enabling “more consumers to have their needs and wants addressed”. This removed the potential for biased advisers by banning commission payments and imposing fees for advice. It also increased the qualifications required of financial advisers as part of a drive to improve professionalism in the industry.
The downside has been more complex regulation and higher costs for advisers. Individuals are now estimated to need upwards of £61,000 to £100,000 of investible assets to be a profitable client for financial advisers. As a result, advisers are charging an average of £150 per hour in fees and many people appear unwilling to pay.
To offer an alternative, the UK government created a free national financial “guidance” scheme in 2011. Guidance falls short of regulated financial advice because it cannot involve giving an individual recommendation, but this difference has caused confusion. The trouble is that no one is liable for bad guidance in the way that they could be for bad advice. People can make pension decisions not appreciating this distinction.
The UK’s main provider of financial guidance, the Money Advice Service, has not helped by claiming to provide “free and impartial advice”. (The service was recently condemned as unfit for purpose and is being replaced.)
People can also get free pension guidance on the new pension freedoms from Citizens Advice and the Pensions Advisory Service. But many people still access their pension pots at retirement without such guidance. When it comes to deciding what to do with the money, many have simply deposited it in a bank account.
The government’s latest proposal is to allow individuals to take up to £500 out of their pension pot to pay for advice. This is helpful but may only pay for two or three hours, so it’s of limited use (even assuming it persuades a good number of people to buy advice rather than just raiding their pension pot).
The regulator is also encouraging the financial advice sector to innovate by providing more “robo-advice” – cheap and accessible online advice built on algorithms, among other things. To date, progress has been limited, but it now seems as if a number of advisers may now be entering the robo-advice market.
The road ahead
When people are not saving enough for retirement and the ultimate responsibility for financial outcomes is increasingly with individual savers, it is incumbent upon the government to ensure people can cope with the demands placed upon them. At present, its policies are not accomplishing that.
Since the 2008 financial crisis, many people have had a lack of trust in financial services, making some unwilling to invest in financial products, at a time when rising life expectancy means everyone needs their money to last for longer. Put together, the prospects for pension retirement outcomes are becoming more and more worrying.
Haldane recently said it may be better to invest in property than pensions, arguing that property prices were likely to keep rising unless we finally get to grips with the shortage of new housing. This is not financial advice, of course, but for some it may be the nearest many people are going to get unless robo-advice proves to be successful in widening access to affordable financial advice.
Failing that, the government risks creating a generation of older people who cannot afford to look after themselves. If that happens, we will all pay the price.