Good pensions advice 'critical'
%VIRTUAL-SkimlinksPromo%Fears have been raised that Chancellor George Osborne's radical shake-up of pensions will encourage some people to burn through their retirement savings and leave them vulnerable to spending their old age in poverty.
But experts also suggested that the moves, which will empower pension savers by giving them a much wider choice of what they do with their nest eggs, will lead to some people shoring up more cash.
The pensions revolution will mean many people will no longer feel forced to turn their pension pot into an annuity when they retire, which will give them a fixed income for life.
Several changes announced in the Budget will be enacted in one week's time, meaning that around 400,000 people will be able to access their pension savings in a more flexible way in the coming financial year.
The moves announced yesterday led to around £5 billion being wiped off the value of firms involved in pensions.
They come as the Government's automatic enrolment workplace pension reforms continue to be rolled out to tackle fears that people are not saving enough for their retirement, which have so far created around three million new pension savers.
Joanne Segars, chief executive of the National Association of Pension Funds (NAPF), which represents 1,300 pension schemes, described the announcements as "perplexing".
She said: "On the one hand the idea that savers can take their pension as a lump sum, albeit subject to tax, may be an incentive to save.
"However, this choice brings with it a significant burden of responsibility for individuals to understand the choices they are making.
"We know this is not always the case as people often underestimate how long they will live and overestimate how long their pot will last."
Ms Segars raised concerns about the risk that people might run through their pension pots too quickly.
She continued: "We fear these reforms, without careful scrutiny, will leave a large swathe of people vulnerable to poverty in old age."
From next Thursday, the size of the amount of overall pension savings that someone is allowed to take as a lump sum will almost double, to £30,000.
The size of an individual pot that someone can take as a lump sum, perhaps because they have only worked for a certain company for a few years, will increase five-fold to £10,000.
The Government is also legislating so that from April next year, people aged over 55 will be taxed at normal marginal rates of income tax if they want to take money out of their defined contribution (DC) pension.
At present, they are charged 55% tax if they withdraw the whole pot.
The Chancellor has also pledged £20 million over the next two years to develop a new "right to advice" with consumer groups and industry bodies.
Everyone who retires with a pension pot which could be used to buy an annuity will be offered free, impartial face-to-face advice on what their options are.
This could also help people who do want to buy an annuity to shop around for the best deal.
Controversy over annuities has been mounting amid plunging rates in recent years and fears that many people are unaware that they could possibly get a better deal by shopping around rather than sticking with their existing pension provider.
Once you have used your pension pot to buy an annuity, which usually gives you a guaranteed yearly income for life, there tends to be no possibility of reversing that decision if you later come to regret it, perhaps because your circumstances change.
Legal & General, which saw its share price tumble by 13% after the shake-up was announced, said it expected to see savers putting more money aside as the Government was effectively transferring the risk of someone outliving their pension savings onto the pension saver.
It said that to avoid people over-spending early in retirement and running short later, contribution rates into pensions should rise and retirement ages should increase.
Think tank the International Longevity Centre-UK said that while the plans offered more flexibility, for some retirees, annuities helped to reduce the risk of them living in poverty towards the end of their lives.
It said it was "critical" that good, accessible advice be on offer to help people approaching retirement to make an informed decision.
The Financial Services Consumer Panel, a statutory body which advises the City regulator on consumers' interests, welcomed the moves.
Sue Lewis, chairwoman of the panel, said: "The proposal for everyone to have the right to free and impartial face-to-face guidance at the point of retirement is particularly welcome.
"This would really help people make an informed choice about their options for retirement income."
John Ball, UK head of pensions at Towers Watson, said the moves would mean that some pensions "won't always be pensions any more" as they will not have to provide a regular income throughout retirement.
He said: "Of those who choose not to buy annuities, many may enjoy better outcomes, but some will burn through their money too quickly and others will be too cautious about how much of their savings they allow themselves to withdraw and spend."
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