Pension clinic: guidance will be important, but not enough to protect customers

Each fortnight in her exclusive blog for Money Observer, independent pensions expert Dr Ros Altmann will help you understand more about how pensions and savings work, and help you become a better-informed investor. She will also take a piece of industry jargon and explain it for you in plain English.

You are no doubt are aware that a pensions revolution is underway in the UK. The old system which forced you to buy either an annuity or drawdown product with your defined contribution pension savings is being swept away, to allow you to choose how to use your pension fund.

Since this change should lead to new types of product being offered for retirement income, the government recognises you may need some help in making the best use of your hard-earned savings, so it is setting up a free, impartial financial guidance service to help you understand your options. Four to six months before you reach your scheme pension age your pension company will have to tell you how to access the guidance.

How will this new guidance system work?

It will be a brand new national programme offering you a choice of three channels - online, with information drawn up by the Treasury and Money Advice Service, on the phone, with telephone sessions run by the Pensions Advisory Service, or face-to-face individual sessions run by the Citizen's Advice Bureau.

You may not want to travel to a local Citizen's Advice Bureau office to meet a guide in person, so offering a range of different channels is sensible. Guidance will be available for each pension pot, so if you have more than one pension fund you will be entitled to more than one guidance session.

The government wants the guidance service to become a recognised strong brand of 'Retirement Pension Guides' - the name will be announced soon. It will have no connection with financial product or service providers and, therefore, no interest in selling you anything, so you can trust its impartiality.

Will this be financial advice?

No. It is important to realise that this is only financial guidance, not regulated individual advice. It can help you consider the important questions you need to ask before deciding what to do with your pension funds, but it will not provide the specific answers. You will be left to make your own decisions and any mistakes will be your responsibility.

The guidance is expected to operate to consistent standards, overseen by the Financial Conduct Authority (FCA). It needs to be comprehensive enough to help you make decisions, but also to recognise the benefits of paying for professional advice if you are not sure what best to do.

A vital part of the sessions will be to explain the tax implications of taking your fund too quickly and the tax incentives to keep your money in your pension as long as you can.

It will also need to help you plan when to start taking money out of your fund - just because you are reaching your scheme pension age does not mean you have to take money out at all. For example, if you are still working, or you have other pensions, it may be best to leave the money to grow for the future.

Introducing standard pension statements to use in guidance would help enormously

To make the best use of your guidance session, you should have details of your pensions to hand, as well as your own personal circumstances, to help tailor the session to meet your specific needs. It could also take account of any other income you have and dependants' needs to help you plan your later life income.

I would have hoped the government would require your pension providers to give you standardised information about your pension savings - including the latest value of your fund, any special features such as guarantees and restrictions or penalties on the timing of taking your money.

Compiling a uniform, consistent statement for each person's pensions would help enormously when assessing what is best to do.

What will the guidance not cover?

The guidance will not tell you what actual product to buy, which providers to use or which adviser to go to.

It will not give you individual product recommendations - for this you will need to consult an independent financial adviser.

Take financial advice if you're not sure what to do

After the guidance session, you may need further help. Perhaps seeking professional, expert advice which you have to pay for, to ensure you make good choices.

With a decision as important as retirement, you may want the reassurance that you have used your pension savings wisely.

Will people use the guidance?

There remains a risk that many people will not take up the guidance offer. We do not know how many people will use the new service, or how helpful it will be. Therefore, I believe it is important that there is an extra layer of protection for consumers.

I hope that the financial services regulator - the FCA - will force pension companies to take more care when selling pension products such as annuities or income drawdown policies.

If your company has to ask you about your circumstances, such as your health, your dependants or your other income sources, they will be less able to sell you an unsuitable product.

This layer of extra protection would have been really helpful under the old rules, but with the new flexibility and freedoms, it is even more essential that you have the fairest chance of doing the right thing.

These new reforms could be a disaster if too many people make bad decisions, so getting the guidance right, encouraging advice and improving regulatory protection for consumers are really important to the success of this pensions revolution.

You can find out more about Dr Ros Altmann and her archive of articles at You can follow her on Twitter via @rosaltmann.

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