Pensions, freedom and choice - Do you want guidance or advice?

George Osborne’s March 2014 Budget saw the prospect of a new dawn for individuals with personal pension funds.  His proposal was that flexibility would be introduced to enable access to pension funds without limitation, and after some initial concerns expressed in the media about the potential for some people to spend their entire pension pot on a Lamborghini, the proposals were almost universally welcomed.

Although some interim flexibility is already in place, the new rules will fully come into effect from April 2015 onwards, so with flexible access to your entire pension pot and 25% of it remaining tax free, what’s not to like?

Also announced within the budget, but attracting less attention, was the Chancellor’s statement that all retirees would receive free impartial advice at the point where they make their decision on how to extract their pension savings. The term ‘advice’ was subsequently watered down to ‘guidance’ (although both terms are still widely used), but what is the difference between the two?

Let’s start with advice. Advice involves the adviser establishing a clear understanding of your full financial circumstances, discussion around and agreement of your financial objectives and risk outlook, then providing formal written recommendations setting out a specific course of action. Once implementation of your plans has taken place, where appropriate, a programme of reviews is agreed.

Advice is tightly regulated, with the protections that regulation affords. It should also be easy to understand, bearing in mind that a formal recommendation to take specific action is made.

Guidance on the other hand, does not involve a recommendation, but involves provision of information and an explanation of options in order to help you make your own decision. The final decision rests entirely with the individual and if things go wrong there is rarely any recourse.

The Government’s guidance model was further developed last month, with the plan being that it will be delivered by a range of independent organisations, including The Pensions Advisory Service (TPAS) and the Money Advice Service (MAS). It will also not be a one-off and individuals will have what is termed ‘unlimited access’, although only the first half hour’s consultation is free.

The cost of provision of the service is estimated at between £13M and £25M* and will be partly funded by a levy on the ‘advisory industry’, but given the task in hand one has to wonder about the capacity for TPAS and MAS to effectively deliver the service levels required. *The ABI estimated £13M as the cost, as it was envisaged as being a one-off activity. The £25M figure was suggested by Andrew Power of Deloitte.

To many people guidance will feel like advice and as such it will inevitably shape their thought processes, but in reality they could be making life changing decisions without being aware of all the facts. If the decisions they make turn out to be poor, they will have to live with them.

My concern is that many thousands of people retiring every year will need proper financial advice to help shape their decisions about what to do with their pension arrangements, but what they could be offered may fall a long way short of what they actually require. Do most people really believe that half an hour’s ‘guidance’, or logging onto a website that takes you through a generic decision tree is enough to satisfy retirees’ often complex needs?

In my view, for the majority of people a satisfactory outcome will only be achieved by taking carefully considered advice, based on a review of their personal circumstances and objectives, with the options and potential outcomes explained clearly and in writing.

Being a financial planner by profession I would naturally say that, but the alternatives could mean that many people make irrevocable, critical decisions about pension income choices affecting the rest of their lives, without knowledge of all the options available.

David Squire, Partner

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