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Drawdown dilemmas: new 'quality mark' could help retirees
A quality mark and help from employers could help retirees make the most out of their pension.
by Michelle McGagh on Feb 15, 2016 at 12:28
Picking a drawdown policy is a tough decision but a new ‘retirement quality mark’ teamed with signposting from employers to the best products could put retirees’ minds at rest.
The advent of pension freedom has opened up the options for turning a pension into a retirement income but it has also increased the chance of making a poor decision.
While auto-enrolment means those who are saving are pushed into best-of-breed pensions and default investment funds, when it comes to retirement you’re on your own.
Pre-pension freedom, most people only have the choice of buying an annuity and were encouraged to ‘shop around’ – in other words find the best annuity income rate rather than simply buying an annuity from their pension provider.
However, the push to shop around – also known as the ‘open market option’ – failed miserably.
‘When it came to shopping around in the annuity market, most people didn’t,’ said Graham Vidler of the Pensions and Lifetime Savings Association.
‘Half [of retirees] could have got a better deal by shopping around and got, on average, a 7% uplift [in retirement income]. But shopping around didn’t work, in a simple market where you can compare options.’
He said the main problems with annuity purchase, such buying a single-life annuity when you needed to cover your spouse and failing to disclose a medical condition that could get you a better rate, still existed ‘but in the new market the risk of getting an unsuitable product is getting bigger because the choice is bigger’.
Vidler added that the new risks centred around retirees being unable to judge how long they would live and either spending too little and not enjoying retirement or spending too much and running out of money before they died.
Adrian Boulding, pensions expert at the Tax Incentivised Savings Association, agreed that getting people to shop around for the best drawdown policy wouldn’t work.
He is also the chair of the Pensions Quality Mark, an organisation which awards marks for best-of-breed workplace pensions that meet certain standards, and said the organisation was now developing a Retirement Quality Mark that would allow retirees to pinpoint the best drawdown policies based on a criteria of investment, charges and service.
‘It will help signal good quality products that help with investment, [setting appropriate income] withdrawals, are good value for money,’ he said.
‘People are overwhelmed by choice and this simply cuts down the number of [drawdown] plans with default funds. [A reduced choice] helps. People are scared of making the wrong decisions.’
Boulding said the Retirement Quality Mark should be in place by ‘mid-2016’ but it would ‘definitely’ be launched this year.
He believes the pension industry needs to do more to help individuals to get the most out of their retirement income.
‘We are not running a pension industry if people get to age 55 and they cash [their pension] in, we need people to recognise they can have a decent income for the rest of their life.’
Signposts at retirement
It is not just the quality mark that can help retirees make the most of their savings, according Vidler, who wants the regulation around pensions relaxed to allow employers to signpost employees to quality-marked drawdown policies.
For some retirees, typically those working for larger companies, they may have a drawdown option built into their pension and can simply sign up to the drawdown scheme offered to them. However, the employees of smaller companies will simply be presented with a pot of pension money on retirement that they have to turn into an income.
‘We think for the majority of savers who do not work for an employer where a solution is going to be built and made available in the scheme, we need to do something different,’ he said.
‘We need to signpost products…[A signposted product] would not be a default [option for employees], they can choose what they want [in terms of drawdown product] and ignore the signposting.’
Vidler added that the employee would still be ‘in control’ of their pension money but the employer would also signpost to the government Pension Wise guidance service, which offers a free 30-minute guidance session for retirees.
However, he warned that the regulator would have to change the rules to allow signposting and provide employers with a ‘safe harbour’ to ensure the signposting does not lead to repercussions in future.
‘The people doing the signposting should have a safe harbour and will not face a regulatory comeback further down the line,’ he said.
‘We should introduce the concept of signposting – we should put it in communications that say most people, most of the time go into this option that looks like XYZ and this is a good option. You then signpost them to Pension Wise so they can test that option against their own personal circumstances.’
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