Imagine a train packed full of tourists, arriving at the station, but the doors open on the wrong side and there is a gap of over 10 feet to the opposite platform. Some will know the station and will be able to navigate their way out, but still face the perils of traversing the tracks. Others will be lost already, and somewhat bewildered by the challenge in front of them. Train officials will be helping, but they are few in number and can only do so much. And there are more trains due in soon, which will face the same problem.
I don’t mean to be alarmist, but this is what springs to mind when I consider the challenge posed by the changes to pensions announced in the Budget. I’ll try and explain my rambling metaphor.
The station The station is, quite simply, the new freedom and choice that comes in April 2015. People are attracted to it, because of the multitude of destinations it provides access to.
The trains From April 2015, we will have large cohorts of people eligible to take their benefits in a way they never could before:
The first train is full of people approaching 55 who have been informed of their right to take money from their pension pot. They’re mostly still working and have no intention of retiring but do have outstanding mortgages, debts or offspring wanting to spring off to university. They will be keen to know what they can do with their pension to meet these upturned palms.
The second train will be those that have deferred doing anything since George Osborne announced the changes and when they would take effect. It will be a mix of people who had taken their cash but backed out of purchasing an annuity and those who have simply deferred doing anything, knowing they would have more options if they waited. Many will have stopped or slowed down working, looking forward to this ever-lasting holiday. Some may even have worked an additional year to plug the gap in their income.
The third train is a mix of people who are simply over the age of 55, with at least some pension funds, who have heard about the changes and want to know what it means for them. Some will have DB benefits and want it know if they can do the things they’ve heard about. Some will have DC pots from jobs many years in the past, and want to cash them in. Some will already be receiving an annuity income and – through no fault of their own – realise they’re on the wrong train.
The people The people are just people. I won’t typecast the human race. They’re just a collection of unique individuals with unique circumstances and personalities.
The platform Some people are already on the platform, supported by their adviser and making the most of their assets in a way that is both tax efficient and flexible. And more people will join the platform, traversing the rails with the help of their adviser, paying charges and fees that they are willing to incur for this important service.
The other platform The closest platform is the ‘guidance guarantee,’ the promise of a helpful and informative conversation with an impartial guide, at no additional cost. These doors will open for people on request and many – having been well informed of the risks of taking cash or buying annuities – will continue their journey from there and never need to return to the station.
The gap If you’ve read this far, then you’ll be rewarded with finding a point to this meaty metaphor.
The gap (10 feet across the rails, remember) is where many people find themselves. They’ve had the guidance, and they’ve decided not to go to the ‘extremes’ of taking cash or buying an annuity, but they’re now on their own trying to navigate the myriad of choices in between. The platform is a step too far. They don’t have assets to justify it and few advisers could lower their fees to a point that these people find acceptable. But the range of products on offer from providers – everything from insurance based to investment orientated – is bewildering.
They want help to allow them to carry on with their journey but don’t know where to turn. They will pay, but not enough to merit a clamour of interest from advisers.
There are a lot of people here.
The rats As you will find on any train track, there are rats. In this case, the rats are liberators. Some will promise tax-outweighing returns for those that take the whole lot out of their pension and invest in a foreign property venture; an illiquid, uncertain, perhaps even fictitious piece of land that is apparently ‘ripe’ for development into a mega-complex holiday home hotel space station for rich people on Mars. Type of thing.
Stepping aside from the metaphor for a serious second, what I’m suggesting is that we will have people for whom the guidance conversation will be sufficient; people for whom support is available from advisers using wrap platforms and the like; and people in between who might be willing to pay £200-£300 for some help, but for whom the options of such help are limited.
In our response to the Treasury consultation, we called for the £150 tax deductible limit to be raised, allowing employers more scope to help facilitate help for just this population. But I’m not an adviser and it would be naive of me to suggest help can be given (or what help can be given) for just a few hundred pounds.
What I am confident about is that the demand will be there. A recent study by unbiased.co.uk suggests people have a variety of expectations of the guidance they receive; ranging from a general overview of options to a face to face meeting with a professional adviser at the government’s expense.
I’m not a pessimist – far from it – the new pension freedoms are a very positive thing and will give people much needed flexibility in taking income in a way that suits their needs. But this will only work well with the right support framework in place. The Money Advice Service and Pensions Advisory Service will, I’m sure, deliver on George Osborne’s promise, and providers will support them. Advisers will continue to help those who can pay for the use of a platform or similar. It’s the people in the gap between that concern me.
To a large extent, it will be one of the first big tests of whether we can address the advice gap that has arisen following the RDR.
As I travel between meetings to talk to people about how we face up to the challenge of supporting people in retirement, I am reminded at every train and tube station of just how big a challenge it is. The man who recorded it I’m sure had no idea how important his ‘mind the gap’ warning would become in this context.
In Edinburgh, we now have trams. Maybe they’ve cracked it.