With 10 million workers newly saving into pensions as a result of auto-enrolment, there is a tremendous opportunity to help more people plan for a richer retirement. However, without improvements in engagement with pensions and investments, this opportunity may be wasted. Indeed, the key to maximising that potential may well lie with financial advisers.
Since 2016, radical pension reforms have replaced that era of one-size-fits-all approaches with new pension freedoms, giving more choice and flexibility about how and when pension savings are used. This could be brilliant for customers, but those approaching decumulation need urgent help – and advice. Without better-informed customers, the freedoms might be used inappropriately. In fairness, alongside the new rules, the government intended to introduce a system of free financial guidance for all customers before they made final decisions about their pensions. The chancellor announced there would be free financial “advice”, but the Treasury corrected the term, clarifying this was only guidance.
Of course, guidance can help people understand the important questions they need to consider, but it will not give them the answers that are right for their own specific circumstances. Only qualified independent financial advisers are likely to do that. Pension Wise guidance was originally expected to encourage more people to use financial advisers, once they realised the complexity of pension options. Unfortunately, this has not really materialised.
When I was pensions minister, we introduced the £500 advice allowance, so that customers could pay for financial advice out of their pension savings, but take-up of this has been extremely low. More employers and providers should encourage their members to use this.
Guidance is just not enough to ensure people make the best use of their pension savings. It is only a first step. Independent, expert financial advice can stop people withdrawing funds when they do not really need to and even encourage them to invest more for longer.
Ros Altmann is former pensions minister