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- The Reformer Blog
17 December 2014
How do you plan for a future retirement which could last as long as your working life, during which you could experience major changes in both your personal circumstances and in wider economic conditions over which you have no control?
Earlier this year Age UK set up a Financial Services Commission to explore these issues. We concluded that while the government’s pension reforms might drive welcome change in the financial services landscape, the desire to give people more control and flexibility must be balanced with the need that most people have for a base level of certainty, as well as ensuring transparency and fairness. The changes must also meet the needs of people with modest pension savings, with a focus on good value, and provide good outcomes for those who know little about financial products.
The financial products currently on the market do not sufficiently support these aspirations. In particular, we would like to see products that complement actual retirement spending patterns. For example, people may spend more in the early, active retirement years. Income needs may then level off, only to increase again, with additional medical and care expenses – the so-called “u-shaped curve”. Experience from the US and Australia is that some people may overspend at the beginning of retirement; our fear is that people may also “underspend”, unnecessarily restricting expenditure in order to guard against the unforeseen or leave an inheritance for their family.
Against this backdrop, products offering certainty, such as annuities, still have an important role to play. The challenge now, as the market develops post-reform, must be to ensure that innovation works in the consumer’s interests, with a focus on good value. This has not always been the case in the past, and regulators will need to be proactive in forestalling problems.
These challenges also highlight the need for information and advice. The Guidance Guarantee promised by the Government will be vital, but it will need to be broad enough to encompass related issues such as debt, carrying on working, tax and planning ahead for the cost of care. For example, people may need to consider whether to use pension savings to pay off debt – given that the Financial Conduct Authority has estimated that around 40,000 people a year may soon be retiring with unpaid interest-only mortgages.
It will also be vital that guidance is available when needed – which is unlikely to be just at retirement. Age UK would like to see a joined-up advice journey, with people offered advice mid-career, at retirement and then later on when they may be facing decisions about funding care.
However, guidance can only go so far – people will not be obliged to take it up. Our main test for the pension reforms as a whole is that they must be capable of delivering a reasonable outcome for disengaged pension savers. The final piece in the retirement jigsaw must be to look at how we can frame people’s choices and use defaults to prevent significantly adverse financial outcomes.
Tom Wright, CBE, Group Chief Executive of Age UK
Age UK is a charity and social enterprise that reaches over 5 million people a year through our national advice line and through 170 local Age UKs.