Will UK experience of pension freedoms really be like Australia or America?
The social market foundations recent report compared pensioner experience in Australia and America, two countries with similar pension freedoms to the UK, to try and understand how UK retirees will use the new freedoms and what issues that might create for both individuals and the state.
The report, running to some 96 pages, does a credible job of articulating many of the risks that people will face when planning their retirement income. This is a complex area of financial planning with mistakes easy to make, usually expensive and often irreversible.
The report identifies and analyses 3 key groups; the quick spender, the typical spender and the cautious spender. No doubt the UK will have people that fit into all 3 of these definitions but it is important to remember that everyone is different and will have different needs for income and cash throughout their retirement. The key to retirement income planning is to deliver sustainable income that neither over nor under shoots the target.
The report references the fact that only a third of people in the UK claim to be prepared for retirement and acknowledges that traditional communications, in the form of wake-up packs, simply aren’t working. More guidance, education and advice is needed to help people make effective decisions, particularly those who are more vulnerable such as women, self-employed, early retirees, renters and those with little other savings.
The report makes a number of recommendations. Firstly, the report suggests a dashboard of information and risk warnings needs to be created to understand what people are doing and how they can be helped. This makes sense if we are to evolve policy and practice to help people achieve the best possible retirement outcomes. Unfortunately, many of the warnings will come too late for some but without collating and sharing this information, we will constantly be speculating about the best course of action and future policy change. The information is out there but requires somebody to bring it together. The report suggests the Treasury and I’m struggling to think of any other group/company who would be better placed.
The second key recommendation is that retirees should have a mid-retirement health check recognising the fact that what was right a few years ago, may no longer be right today. Unfortunately, this one-off check is missing the point and even based on the report analysis, many will have run out of money or be beyond help by the time the review is due. Thinks can change quickly when using flexi-access, both personal circumstances and objectives and external market conditions. If your plan comes off the rails, it’s vital to take remedial action quickly to get back on track. We would strongly recommend annual reviews for anyone using flexi-access drawdown.
The report also contains a number of deficiencies:
- We are not the same as Australia and USA, both culturally and how our pension freedoms, tax and state welfare systems operate.
- A 30% equity and 70% gilt portfolio for flexi access drawdown appears an odd selection for the analysis and is unlikely to suit the needs of many flexi-access investors.
- The report suggests regulated advice is unaffordable. This ignores the many innovative advice solutions which have come to market, some offering quality regulated advice at a highly affordable £150 such as our Pathways service.
- The focus of the report, as with so many other initiatives, is that it focuses on ‘at-retirement’ and we need to strive for better engagement and decision making in the pre-retirement years.
- Finally, the report lacks real understanding of the dynamic nature of flexi-access and the fact it must be an ongoing and evolving process.
It is going to take years for us to understand the long-term impact of the new pension freedoms. That understanding and experience is also likely to evolve as the number of people with DC benefits and the average size of those benefits starts to increase. While I am supportive of the new pension freedoms, they will undoubtedly result in a number of people achieving poorer retirement outcomes, either by spending too quickly or not spending enough. It’s vital we now look to improve the support and advice available to retirees to help them make effective retirement planning decisions. This should not just be left to individuals and a host of other parties need to raise their game, including employers, government, pension providers and the advice community, if pension freedoms are to deliver the benefits that are attainable.
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