The 2014 budget announcement made by George Osborne in relation to pensions came as a surprise to many in the pension industry as overnight he transformed the manner in which members of money purchase scheme will be able to access the benefits that they have built up prior to retirement.
These changes will provide individuals with a good deal of flexibility on how they fund their retirement and at the same time passes on to them the additional responsibility and risk of choosing what options to take. In recognition of these new choices members of money purchase schemes will have the right to receive free guidance on how they should approach these decisions.
In the 2014 Budget George Osborne made the following statement:
"everyone who retires on these defined contribution pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have...".
The guidance guarantee that is scheduled to be introduced from 6 April 2015 represents the Chancellor’s pledge to provide financial guidance to all members of a defined contribution on their retirement.
The Guidance Guarantee
The legislative framework for the provision of pensions guidance will be introduced by an amendment to the Financial Services and Markets Act 2000.
The key points include:
- Guidance will be offered though a broad range of channels, including online and over the phone as well as face-to face.
- Guidance will be free to the consumer, as it will be funded by a levy on regulated financial services firms.
- Pension guidance will be defined as “guidance given for the purpose of helping a member of a pension scheme to make decisions about what to do with the cash balance benefits or other money purchase benefits that may be provided to the member".
- Pension guidance may only be given by the Treasury's designated guidance providers. HM Treasury announced on 18 October 2014 that the Citizens Advice Bureau (CAB) and the Pensions Advisory Service (TPAS) will be its initial guidance providers, but the draft legislation allows HM Treasury to designate additional bodies to provide pension guidance.
- The Financial Conduct Authority (“FCA”) will have responsibility for a new regime of standards for guidance and will monitor compliance with them.
- Both contract-based DC providers and the Trustees of trust-based schemes will be obliged to make members aware of their right to the guidance guarantee and “signpost” them to the guidance service as they approach retirement.
- Guidance will be provided on a “per pot” basis, so individuals with a number of pension pots may potentially be offered a number of sessions.
The guidance session provided by TPAS or CAB will set out an individual’s options such as taking an annuity, drawdown, cash or a combination of these, with individuals advised that any decision that they make will remain entirely their own responsibility. They are also likely to be given generic guidance on issues such as taxation, the danger of living longer than expected and running out of money, the impact of state benefits and possible long-term care needs.
However, ultimately the guidance guarantee will not provide individuals with specific financial advice and it will most likely be necessary for individuals to seek further advice from an Independent Financial Adviser at their own expense.
David Loosemore comments: “for most individuals the prospect of planning for their retirement is a daunting one with the many variables of modern day life making it increasingly difficult for a person to choose the best option or options available to them in order to fund their retirement. The guidance guarantee is certainly a positive step to ensure that individuals are aware of the issues that they need to consider, though on its own it is unlikely to answer all of the varied questions and challenges for individuals that will arise as a result of the pension industry changes to be introduced from April 2015.”