What should be the default option for pensions at retirement?

The removal of the annuity default has opened up the question of what the default option for pensions should be. The answer is obvious, but would take time to implement.

The default solution for pensions at retirement should be a financial plan. If retirees were obliged to get a financial plan before buying any products or having their pension paid out to them, they would be able to take rational decisions about retirement.

The choice about what to do with a pension requires the retiree to be able to analyse income, outgoings, assets and liabilities, both current and future. It requires an understanding of all financial products, not just pensions.

This solution couldnt be delivered overnight though, but it is achievable.

The first thing a government would have to do is define what is meant by “retirement”. They are going to need to do this anyway. The new rules, which entitle people to some sort of guidance, are likely to define “retirement” by what people told their pension provider on a form when they entered a “selected retirement age”. That’s not going to work in a world where people have several different pensions with varying retirement ages and where retirement has become a process, rather than an event. But, if people are to need a financial plan, the government would need to be able to tell people by when they will need their financial plan and how often they will be entitled to one, in order to provide the necessary resources.

I doubt that there are enough financial planners around at the moment to deliver the financial plans required for all of the retirees (but I doubt there are enough guides around to deliver the proposed face to face guidance from next year); however, there are a lot of financial salespeople (who used to work in banks, largely) who could convert into financial planners relatively quickly. Add the young unemployed to that, and in a few years time, there could be the capacity to match the demand.

The requirement to get a plan would not only make for a better informed and, hopefully, happier retired population, but it would also create employment. It might even revive a savings culture in the UK.

In the longer term, a combination of financial education and technology would allow people to build their own financial plans, giving them the choice of doing it themselves or paying a planner to do it for them.

It’s unlikely to happen now; but maybe a couple of years of the additonal pension freedoms will make it necessary.

The benefits of this are fairly obvious to us all. For government and employers, a workforce with a financial plan will be better motivated and more likely to be self reliant.

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3 thoughts on “What should be the default option for pensions at retirement?

  • Philip,

    I couldn’t agree more.

    We have a golden opportunity to engage people in retirement saving and it would be a waste if we didn’t capitalise on that.

    We’re moving to a position where people start saving through simple inertia (automatic enrolment) but where they will have significant choice in retirement. Our challenge – as you rightly point out – is how we engage them in the meantime, arming people for the decisions ahead.

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  • Hi Phil,

    I believe that we all have to work hard to make all savings activity much more consumer friendly so that people can begin to have faith that sacrificing today will actually produce some future benefit.

    In our business we have found that giving real time information on line, available when the client wants it has made a huge difference in peoples attitude to the savings process.

    The days of annual statements written in gobbledegook and delivered months in arrears need to be consigned to the dustbin.

    Equally if not more important is the need to recognise whose money it is that we are looking after especially when it comes to employer sponsored arrangements. All too often the employees has been seen as a bit player in the process sidelined when decisions need to be made.

    Almost all people do want to try and make provision for their later lives and will respond positively to the right approach.

    And it is very possible to make real money from promoting savings activity but the remuneration will be in much smaller amounts and will need technology to administer it profitably.

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  • I think we need to work on getting people used to paying us differently than they have in the past.
    It should be normal for people to write a financial planner a cheque for a financial plan, with the financial plan being unrelated to any product activity. Whilst this happens, it is a long way from being the norm.
    Successive governments have encouraged people to make savings for retirement through pensions, and then complicated them to the extent that a skilled financial adviser is needed to help people work out what to do with them, when they get to retirement age. The “default” annuity option has been inadequate for many years, but the government has now left people to fend for themselves (unless we pretend that insurance companies are somehow going to change their culture and recruit and train enough people in the next twelve months to offer impartial guidance to everyone with a NRD).
    It is the responsibility of government to help people out of the hole they have encouraged them to dig.

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