What should be the default option for pensions at retirement?

The removal of the annuity default has opened up the question of what the default option for pensions should be. The answer is obvious, but would take time to implement.

The default solution for pensions at retirement should be a financial plan. If retirees were obliged to get a financial plan before buying any products or having their pension paid out to them, they would be able to take rational decisions about retirement.

The choice about what to do with a pension requires the retiree to be able to analyse income, outgoings, assets and liabilities, both current and future. It requires an understanding of all financial products, not just pensions.

This solution couldnt be delivered overnight though, but it is achievable.

The first thing a government would have to do is define what is meant by “retirement”. They are going to need to do this anyway. The new rules, which entitle people to some sort of guidance, are likely to define “retirement” by what people told their pension provider on a form when they entered a “selected retirement age”. That’s not going to work in a world where people have several different pensions with varying retirement ages and where retirement has become a process, rather than an event. But, if people are to need a financial plan, the government would need to be able to tell people by when they will need their financial plan and how often they will be entitled to one, in order to provide the necessary resources.

I doubt that there are enough financial planners around at the moment to deliver the financial plans required for all of the retirees (but I doubt there are enough guides around to deliver the proposed face to face guidance from next year); however, there are a lot of financial salespeople (who used to work in banks, largely) who could convert into financial planners relatively quickly. Add the young unemployed to that, and in a few years time, there could be the capacity to match the demand.

The requirement to get a plan would not only make for a better informed and, hopefully, happier retired population, but it would also create employment. It might even revive a savings culture in the UK.

In the longer term, a combination of financial education and technology would allow people to build their own financial plans, giving them the choice of doing it themselves or paying a planner to do it for them.

It’s unlikely to happen now; but maybe a couple of years of the additonal pension freedoms will make it necessary.

The benefits of this are fairly obvious to us all. For government and employers, a workforce with a financial plan will be better motivated and more likely to be self reliant.