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Will Osborne have means to deliver on pension vow?

EXPERIENCED financial advisers are questioning how the Chancellor will be able to deliver on the pension promise he made in this week's Budget.

OVERHAUL: Chancellor George Osborne's Budget ushered in big changes to pensions, but will it all work out as planned? Picture: Luke MacGregor/Reuters
OVERHAUL: Chancellor George Osborne's Budget ushered in big changes to pensions, but will it all work out as planned? Picture: Luke MacGregor/Reuters

As part of the bombshell announcement that people would be free to cash in their pensions after the age of 55, with no requirement to buy an annuity, Mr Osborne offered an "advice guarantee" to everyone with a defined contribution pension, such as a personal pension.

He said a £20 million scheme would ensure that everyone would get free, impartial face-to-face advice on how to make the most of their retirement choices now they will no longer be forced to buy an annuity.

There is already scepticism about the quality of advice that is likely to be provided. Patrick Connolly, of independent financial advisers Chase de Vere, said: "The Budget documents actually refer to 'guidance' rather than 'advice'. 'Guidance' is something which is usually not tailored to the individual."

He went on: "While we fully support the fact that people should have more flexibility with their pension pots at retirement, more flexibility also means that there is more scope to get things wrong, so proper advice is more important than ever."

Advisers believe that people will need help to avoid many potential pitfalls, such as paying too much tax if they take out their pension pot too quickly, or seeing their retirement income suffer if they fail to diversify their investments. They also predict that reports of the death of annuities may be exaggerated as it may still be in some people's best interests to buy them.

Under present rules laid down by the Financial Conduct Authority (FCA), independent financial advisers who provide advice on retirement options have to be highly qualified and thorough.

Perth-based pensions specialist Douglas Baillie said: "For example, the FCA requires advisers to consider clients' other income and commitments before discussing all the options and making a recommendation."

There is already a shortage of qualified pension advisers.

David Trenner, technical ­director at Intelligent Pensions in Glasgow, commented: "Not all independent financial advisers know about pensions and most companies no longer have their own pension managers. So where on earth are people going to be found to provide face-to-face advice?

"I think it is a nice idea, but it is pie in the sky."

There are concerns that if pension providers give consumers advice about their options, they will end up recommending their own products as alternatives to annuities - exactly the problem that the current annuity requirement creates.

According to Mr Connolly, the first thing people will need to think about if they want to take their pension in cash is timing.

He said: "If they want to avoid paying higher rate tax on it, they may need to spread their withdrawals over several years rather than taking it all at once."

When deciding what to do with their money, people will need to be careful about regarding their pension pot as one-off windfall and think realistically about the level of income they will need during their retirement and for how long, taking inflation into account.

Advisers report that when people get to retirement, they often underestimate their life expectancy. They don't take into account that they may still be around in 30 or 40 years' time.

In the sternest warning about what people are liable do with their pension pots when they can have full access to their money, Joanne Segars, chief executive of the National Association of Pension Funds, pointed out: "It is concerning that there appears to be little robust modelling to reassure us the Government has understood the risk that a number of people will run through their pension pots far too quickly. We fear these reforms, without careful scrutiny, will leave a large swathe of people vulnerable to poverty in old age. "

A good adviser will discuss how a long-term income can be achieved, and specialist advisers already provide this to those who take advantage of existing pension drawdown schemes. Richard Wadsworth, at Carbon Financial in Glasgow, said: 'I always like my clients to have a certain minimum level of secure income in retirement, so using part of the fund to buy an annuity if they don't have a final salary pension is an important option. Then they can consider how to invest the remainder of their pension, observing the basic principle of not putting all their eggs in one basket.

"This should include higher growth investments, as otherwise they might as well use all the money to buy an annuity."

Mr Trenner fears that without proper advice, many people will make poor investment decisions with their pension cash, ignoring the need for diversification. He said: "They may decide to put it all into, say, a buy-to-let property to provide them with an income. But this is a high-risk strategy - what happens if the property is vacant? Or they may just put it all into their bank account."

Mr Baillie believes that ignoring annuities could be bad advice, for example, if a pension plan includes a guaranteed annuity rate. These rates can be as high as 12%. Mr Baillie admits he is not enamoured with the Chancellor's proposal. He said: "Call me cynical, but I think it is a ploy to get people to spend more of their pension cash and stimulate the economy. I don't think it is necessarily in the interests of pensioners who may turn round in a few years time and wonder where their pension has gone."

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