Jonathan Watts-Lay, Director, WEALTH at work, comments;
“As a result of the new Pensions Bill, announced in the King’s speech, it will be interesting to hear more of the plans for trust-based schemes to be legally required to offer retirement income solutions to members, including default investment options.
Defaulting members may have unintended consequences. For example, will retirees end up in a sub-optimal position because the default only considers that specific pension and not other pensions, or indeed other savings and investments that individuals may have? You can imagine an individual with 2 or 3 different pensions from previous jobs all with differing amounts, some may be very large whereas others maybe smaller, so how will the defaults work? Will the pension with £500k be defaulted differently to the pension with £40k? It is the same retiree but will they end up with differing retirement investment strategies as a result? Equally, perhaps they should be ‘drawing down’ on ISA savings or other taxable investments alongside their pension(s) to ensure they are not paying more tax than they need to on their pension income. Failure to account for this will again put the individual in a sub-optimal position, or to put it colloquially, they may end up with less money in their back pocket each month of retirement because pensions are seen in isolation via the default rather than collectively alongside any other savings the individual may have.
Also, although supporters of decumulation defaults see it as a means to a better outcome, history tells us otherwise. Before Freedom and Choice many retirees purchased an annuity from their existing pension provider, in essence the default position, albeit the majority could have received better rates elsewhere. With default decumulation, we are effectively discouraging shopping around and understanding what will give the individual the right outcome in retirement.
I believe there are considerations around the belief that ‘product innovation’ will solve all retirement income needs; rather than thinking about a broader service model which allows individuals to understand their options.
Before any decisions are made at retirement, individuals really need to understand what their options are and the generic advantages and disadvantages of these options. Providing financial guidance for members and employees at retirement can help with this and will enable them to make informed choices, including being able to decide if they need further support such as investment advice – and therefore lead to better outcomes for all.
Let’s hope the detail is worked through thoroughly otherwise we have set the bar low for retirement income outcomes despite a lifetime of saving!”