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Professional advisers should not fear the pension reforms

CII Thinkpiece no.116

Pensions expert (now Pensions Minister) Dr Ros Altmann discusses the opportunity the pension reforms present to the advice sector be able to demonstrate, to consumers, the value of financial advice. The freedoms were designed to ensure all pension savers, whether their funds are large or small, have the same freedoms and flexibility. But the new rules do mean there are new risks that pension savers will need to understand and consider. 

  • A revolution is taking place for UK pensions. April 2015 ushered in a new era of freedom and choice. All aspects of private pensions are affected - whether personal or occupational pension scheme. Existing annuities could also be affected too if proposals for a secondary market are implemented.
  • The freedoms were designed to ensure all pension savers, whether their funds are large or small, have the same freedoms and flexibility. But the new rules do mean there are new risks that pension savers will need to understand and consider. People could, inadvertently, fall into a tax trap. There is also the risk of new scams or frauds designed to part pension savers from their money. And understanding the nature of product options.
  • The new range of risks and choices, underscores the importance of the other key element of the reforms: Pension Wise guidance. This aims to provide all consumers near or over age 55, who have a DC pension pot, with important information and "a conversation" about their options and the risks of the choices they might make.
  • The Pension Wise service may have more potential than even the industry itself realises, providing consumers with an important insight into the complexity of the decisions they face - thus demonstrating the value of financial advice. The need for external help should become more apparent than ever to the public.
  • The new freedoms do not apply to those who had already bought an annuity. Hence the proposal announced before the 2015 Budget to introduce a market for second-hand annuities.
  • Most people will probably decide to hang on to their annuity, though some might want to consider selling it on. There are several reasons why they might want to consider this. Whereas now their annuitised funds are tied up forever, the proposals would provide choice.
  • The changes provide an opportunity for people to optimise their pension savings, though there are risks. Therefore the need for external help, including professional financial advice should help provide reassurance and provide informed choice.

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