FREE ADVICE for people approaching retirement could transform financial literacy in the UK if it is set up correctly, according to pensions experts.
Changes to the pension system, announced in the Budget, will give people more choice about what they do with their pension and free impartial financial advice to make the right decision.
Under the new plans, a retiree with a defined contribution pension scheme can draw their entire pension in one go from the age of 55, rather than being forced to draw some of it as an income for life under an expensive annuity.
James Daley, founder of UK consumer group Fairer Finance, said: “Lots of people who retire don’t understand their choices and end up sleepwalking into an annuity that might not be right for them.
“There are big decisions to take and people don’t know where to turn to for advice. There is a big opportunity for the Government to come in and create something that is credible.”
He added: “This could be a game-changer. Hopefully, in the future more people will enter retirement making the right decisions for their pension.”
But others are more cautious. Chris Smith, senior investment consultant at Leeds-based pensions advisory firm Towers Watson, said: “It will be interesting to see how it is funded because face-to-face advice is expensive.”
Simon Holt, managing director of G&E Wealth Management, which has offices in York and Leeds, believes that the wide-reaching pension changes could become a social nightmare.
“If people are irresponsible in the way they use the new pension regulations, then these changes could become a social nightmare, which will come back to haunt them and the UK for many years to come,” he said. “Clearly, a 55-year-old can typically expect to live another 25 years but the temptation to go on a huge spending spree is going to be too much for some to resist.
“This could have disastrous consequences, leaving people with nothing to live on in old age.”
Mr Osborne has insisted people should be trusted to make the right financial decisions. He said his budget would help “responsible” pensioners who had been getting a bad deal from annuities.
Mr Daley agrees: “There is a lot of talk saying that people can’t be trusted to manage their own finances.
“That is a patronising view. People have to manage their finances throughout the rest of their life so why not when they retire?”
He added: “There will be horror stories and people who amass a pension and waste it all, but most people will be responsible.”
In the short term, the changes will benefit higher earners and those with larger pension pots but it is hoped that in the longer term the changes will benefit everyone and lead to a more financially-literate society.
Mr Daley said: “The important thing is to shop around – never just buy the annuity offered by your pension provider. You can get 25-30 per cent more money by shopping around.
“Beyond that, you need to think about your options and whether it makes sense to delay or stagger your retirement to boost your income.”
The Budget immediately triggered a huge fall in the share prices of leading pensions providers, including Aviva, which went down eight per cent.
Mr Smith said: “There will have be a lot of innovation in the pensions industry because providers will need to come up with solutions for the new system.”
A spokeswoman for Aviva’s life and pensions business in York added: “Annuities will remain an important option for customers as they provide a guaranteed income in retirement.”