People should soon be able to understand pensions like they understand ISAs and mortgages. That is the big positive I envisage from the UK’s new pensions rules, which come into force in April 2015. The net result should be higher levels of saving and, ultimately, better-off pensioners. However the change also carries some risks.
The good news is that the government’s reforms may finally demystify pensions for millions. At the moment, too few people know or understand what a pension pot of, say, £50,000 would buy them. By contrast, we see ISAs as simple products that savers can easily compare, invest in and move around. The two should be no different.
As pension legislation comes into force we should start to see a situation where ordinary investors talk with friends and family about the best rates and deals, just as they do about ISAs and mortgages. Admittedly, pension products are slightly more complicated, but they aren’t as complex as many perceive them to be. The greater flexibility promised with the new legislation will allow people to put money in and take it out fairly easily, provided they withdraw the funds from the age of 55 onwards.
As people get to grips with the changes, there will be a shift in the balance of power away from the industry and towards the general public. Providers will be forced to become more transparent about products and services and that in turn should lead to more industry competition and choice.
The new arrangement carries risks however. My fear is that too many people underestimate their life expectancy (we are living longer after all) and take too much cash up front. As a result it is far more likely that they exhaust savings and end up calling on the state, or relatives, for financial support. People may also become overwhelmed by the choice on offer and end up choosing the simplest pension product, not necessarily the right one for them.
The government is seeking to address these issues. It has announced the provision of free conversations with the Citizen’s Advice Bureau or the Pensions Advisory Service for people approaching retirement. That is all well and good, but a 45 minute session is not adequate time to get up to speed with the changes, nor make a retirement plan. I suspect people will come away from these sessions with more questions than answers.
Savers have a lot to take in. If it were up to me I would have delayed the introduction to allow people more time to get to grips with the changes. The new legislation may endure a bumpy start as a result. In the longer run however I am confident that these changes to Britain’s pension system will prove beneficial by encouraging a new mindset in the way we plan for retirement.
This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.