The Pensions Advisory Service has warned that scheme trustees and administrators risk being overwhelmed in April by members eager to access their savings at the earliest opportunity, having waited a year for the pension freedoms to come into play.
The greater retirement flexibility announced in this year’s Budget will reduce the tax hit on taking pension pots as a lump sum, and make it easier for scheme members to draw down from their savings.
Defined contribution scheme administrators are being urged by industry bodies to start contacting members due to retire in April, even though the Treasury has yet to flesh out the details of its guaranteed guidance. Research suggests less than half of employers intend to have systems in place to deliver on these retirement options.
Michelle Cracknell, chief executive officer at TPAS – which has been charged with delivering the telephone aspect of the government’s guaranteed guidance, set up to help retirees with this process – told delegates at law firm Eversheds’ annual pensions conference last week that members will be expecting to get their hands on the cash straight away.
She said: “If in April you’re sitting there as an administrator or a trustee, [the member] expects it to happen immediately because they’ve been waiting a year for it… we really need to gear ourselves up because most people are going to be looking to access their money and access it really quickly.”
Scheme members will also expect their existing scheme to offer all the possible options "told to them by some distinguished presenter on the BBC news”, Cracknell said.
“The idea that they’re going to have to close down a policy, perhaps do something in between like guidance or advice, and then open up a new policy, is way, way outside their expectations.”
However, a survey of 105 employers by corporate benefits adviser Wealth at Work, published last Wednesday, found only 45 per cent of employers intend to have the resources and systems in place to provide the pension flexibilities (see chart).
In addition, more than half (57 per cent) of respondents also said they were unsure whether their employees would know where to seek advice beyond the guidance guarantee.
Three-quarters of employers surveyed said they were aware of the legal obligation for providers and trustees to signpost the guidance to members four to six months ahead of retirement.
The Pensions Administration Standards Association issued best practice advice last week, urging DC administrators to start contacting members due to retire in April, despite that fact the Treasury’s guaranteed guidance has yet to be made available.
PASA’s advice note said existing scheme literature will need to be reviewed so that it refers to all options available to members. “The cash option should be presented as one to be very carefully considered and for which independent financial advice is appropriate,” the organisation said.
“We are also recommending to DC administrators that it would be wise to run this revised wording past the scheme's legal adviser to ensure it reflects the upcoming changes without introducing an unintended bias towards either option.”
Insurers cut out
Speaking at the Eversheds event, Mark Wood, CEO at consultancy JLT, said it was a shame that insurers had been effectively removed from the support process helping members make informed decisions at retirement.
“An enormous amount of intellectual capacity and resource has been taken off the pitch,” he said, adding that greater pressure will be placed on smaller entities such as IFAs and accountancies “who are not well equipped to deal with developing the systems necessary”.
Tim Gosden, director of strategy at Legal & General Retirement, said the guidance model would not work well for many customers, who were likely to go back to their provider after receiving the free guidance.
“I think the only way we can get around this is to have some kind of low-cost simplified advice, something that costs £250,” Gosden said. “I can see providers adopting something like this, either doing it ourselves or bringing in someone else to do it.”
Malcolm Booth, CEO at the National Federation of Occupational Pensioners, a non-profit body representing 80,000 pension savers across the UK, said at the conference the complexities would begin for members long before reaching the free guidance stage.
“How do we help the individual work out the conundrum between, you can go at 55 and take all your money; you won’t get your state pension until you’re 67, and that’s likely to move out; and you don’t have to retire at all?” he said. “So how does a person go round that minefield before he even gets to the stage of receiving advice or guidance?”
