Talking head: Industry expert Ros Altmann runs through what scheme members should expect from the guidance guarantee, including the impact of tax, inflation, and the the cost of future care.
As members usually received little help, many bought this lifelong, irreversible product when they did not actually need to, or purchased the wrong type of annuity.
From April 2015 the new pension regime will legally require all scheme members to be offered free impartial guidance about their retirement options.
This should ensure members know what questions to consider and will explain the risks and benefits of different choices. Therefore, trustee duties to members will extend beyond just accruing a pension fund.
Sending members to an annuity broker at retirement will not fulfil their obligations to protect members’ interests, especially as people will have many more options.
Guidance should provide information on all pensions options, online planning tools or decision trees, and telephone or face-to-face advice for members reaching scheme pension age. It should cover the following important points:
Should the member just do nothing, leaving their fund to grow – perhaps they are still working or have other pensions?
Should they just take tax-free cash – possibly for repaying a mortgage, housing repairs or the holiday of a lifetime – but leave the rest invested?
How to make financial plans, calculating expected retirement spending, potential income and how to cover living costs? If they need an income in addition to tax-free cash, how much do they actually need?
The guidance should explain the tax implications of cashing in their pension fund and losing tax-free investment income or death benefits.
It should explain the impact of inflation.
How might the member provide a partner’s income or bequests if they die, or future care needs?
Do they want the chance of future investment returns, flexibility, liquidity and inflation protection or income certainty – and might they want guarantees against sharp market falls?
It should outline the product options and the differences between them.
This guidance will not give individualised advice that recommends the best course of action. It leaves the members themselves to decide the right answers to these questions.
Therefore, it should also explain how members can find an independent financial adviser to provide a personalised recommendation, based on their own circumstances and needs, with regulatory protection against inappropriate or negligent advice.
The new guidance guarantee will help members make better decisions at scheme pension age and potentially obtain better value from their pension savings.
Ros Altmann is a pensions and investment commentator