Guaranteed guidance under UK pension reforms will not be independent, says Pensions Minister

Out-Law News | 02 May 2014 | 3:11 pm | 2 min. read

The 'guidance guarantee' which will back the UK government's proposed new pension freedoms will not necessarily provide for free independent financial advice for every saver, the pensions minister has said.

Speaking to the Work and Pensions Select Committee, Steve Webb said that it would be a "challenge" to require smaller providers in particular to provide regulated financial advice instead of guidance. Instead, the provision of free guidance would "lead people to take more formal advice", he said, in comments carried by Money Marketing.

Webb was responding to a question from Liberal Democrat MP Mike Thornton, who had said that the government's guarantee as proposed could fall short of what was necessary to help people make the best decision about how to take their pension once the new regime comes into force next April. Instead, he suggested the introduction of a provider levy to fund "proper financial advice" instead of guidance, Money Marketing said.

The pensions minister said that the standard and content of the guidance would be confirmed shortly, as part of the government's response to a consultation on some of the more fundamental aspects of the pension reform programme. The government has been discussing the plans with advice bodies like the Money Advice Service (MAS), he said.

From April 2015, the government intends that members of defined contribution (DC) pension schemes would be able to access their savings any way that they wish from the age of 55. The plans also include a new legal duty on pension providers and trust-based pension schemes to offer free and impartial face to face financial guidance at the point of retirement.

Under the proposed new regime, savers would still be able to take up to a quarter of the value of their pension pot tax-free on retirement. Any additional lump sum would then be taxed at their normal marginal tax rate rather than the existing 55% tax rate. Savers would still be able to purchase an annuity, giving them a guaranteed income for the rest of their lives, with their pension pot in full or in part if they chose to do so; or alternatively would be able to keep their pension invested and access the balance over time.

The Association of British Insurers (ABI) has asked the government for clarification over exactly what would be covered by the 'guidance guarantee', warning that otherwise it would be difficult to estimate how much the new requirement would cost providers and whether these costs would be passed on to customers. Consultants at PwC have estimated that at least 400,000 extra hours of guidance per year would be required, costing as much as £120 million annually.

Pensions expert Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, said previously that the government had to be careful to implement this strand of the reforms correctly and in time.

"The Budget, in relation to pensions, had two pillars, both needing to be as strong as each other: flexibility on taking benefits; and financial guidance," he said. "If the latter is not strong, the former will result in bad decisions and create risk of mis-selling and fraud."

In his evidence to the Work and Pensions Committee, Webb also denied allegations that the reforms were a "death blow" to the annuities market. Instead, he said that they would likely increase competition between providers. The Financial Conduct Authority (FCA) is currently carrying out a competition market study of annuities providers, after its thematic review of the market revealed in February that few pension savers shopped around for the best deal.

"Clearly there is a set of people, and we can argue and discuss how large that will be, who won't buy annuities now, and estimates, and they are only guesstimates really, vary considerably," Webb told the committee. "But clearly an awful lot of people still need an income in retirement."

"Annuity providers will now know that people have got a realistic choice, which is not buying, just taking some cash and investing somewhere else. And I think that will shake up the market in a way that an incremental reform wouldn't have done," he said.