Pensioners will have the freedom to spend their savings as they wish – but where will this ‘free, impartial’ advice come from?

The Treasury must have remembered the mis-selling scandals of the mid-1990s


With the new freedom to cash in your pension pot, there comes a danger. When you have money, whether at the level of a widow’s small savings or a rich man’s millions, there will always be somebody trying to take it off you. I have seen so many examples of this that I consider it an iron rule. People don’t literally pick your pocket, but it comes to the same thing as so-called financial experts tell you that you should do this or that with your funds and that they can look after the matter very conveniently for you in return for a fee or a commission payment.

It is to the credit of the Chancellor of the Exchequer that he understands this. In his Budget speech George Osborne said: “We’re going to introduce a new guarantee, enforced by law, that 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.”

Hitherto subscriptions to a pension scheme solely provided a regular income in retirement. This was all that could be done with the fund that had accumulated. But Wednesday’s Budget statement changed all this. For the first time, there are options. No longer will you be obliged to buy an annuity that provides the “pension”. Instead your contributions will have created a fund that you can use as you wish.

The Treasury must have remembered the pensions mis-selling scandals of the mid-1990s. This was the ill consequence of an otherwise welcome reform. Employees had been given the freedom to purchase personal pensions that they could carry from one job to another.

Fine, but too often unsuitable personal pension schemes were sold to people who were not in a position to make an informed judgement. At the final reckoning in 2002, the Financial Services Authority announced that it had taken disciplinary action against 345 separate financial firms. Moreover, the victims of mis-selling were compensated to the tune of £9bn. This colossal sum had been wrongly extracted from savers’ pockets.

But despite the new freedom, it might still be wise to purchase an annuity. For it pays out until you die and thus removes the risk that you live so long that you use up all your savings and end up penniless in your final years. On the other hand, if unfortunately you die shortly after taking out an annuity, the “wasted” capital won’t be returned.

But perhaps the pension pot is used to purchase a buy-to-let property instead. “Given the performance of buy-to-let properties in many markets, this could become an attractive option for those with larger pension funds,” said one residential property analyst. Here the risk is twofold: foolishly investing into a property bubble, or being vulnerable to unfavourable legislation if ideas of imposing a mansion tax are transmuted into an attack on second homes.

This serves to emphasise the need for good advice. But how to obtain it? The Chancellor’s remark may provide the basis for an interesting development. He said the advice must be free and impartial. Of course if it is to be free and impartial, it cannot be provided on a commercial basis. So-called “free” advice is never really free. For the adviser will be receiving commission from the financial service providers her or she recommends – a cost that is bundled up with other charges and passed on to the saver.

However, Mr Osborne added that the Treasury would provide £20m over the next two years to work with consumer groups and industry to develop this “new right to advice”. In other words, what we might have here is the kernel of a proposition that could develop into the creation of a free, impartial national advice service for savers. To begin with, it could limit itself to handling enquiries only from those over 55. It could be financed by the industry itself in the same manner as the Financial Ombudsman Service. Another model might be the Citizens’ Advice Bureaux. They deliver advice services from more than 3,300 community locations in England and Wales and are run by 338 individual charities.

This would be a prize worth having – freedom for pensioners to use their pension pots as they choose together with the provision of good advice to help them make suitable decisions.

Strength in numbers

If you screw up your eyes and examine, say, a £10 banknote, you will see that the Chief Cashier signs it on behalf of the “Governor and Company of the Bank of England”. This antique formulation still accurately conveys the way the institution is run – or at least has done until now. For the Governor has always been the big chief. Everything important comes to rest on the Governor’s desk. Everybody else is really an assistant.

So the question posed by the new structure announced this week by the new Governor, Mark Carney, is whether a command structure that has endured since the bank was founded in 1694 is finally going to change. It certainly seems so. Everything is collected together under the rubric “One Bank – maximising our impact by working together”.

The promise is that “we will break down cultural barriers with new ways of working and commitment to a different conduct”, and that “we will promote connectivity through sharing of information and analyses, and more frequent joint meetings, while respecting external committees’ statutory rights and the Governors’ decision rights on Bank policy matters.” Hmm, note the plural “Governors”.

There are now four Deputy Governors with the additional appointments announced this week of Ben Broadbent as Deputy Governor for monetary policy and Nemat Shafik as Deputy Governor responsible for markets and banking – the first woman in such a senior position in the Bank’s history. It is obviously difficult to maintain the Governor as a sort of Supreme Leader when he is surrounded by such high talent. And this, no doubt, is deliberate.

It also has a consequence. For under Mr Carney’s leadership the Bank seems to be turning itself into a formidable institution that is quite as powerful intellectually as the Treasury. The process started in 1998 when the bank was given operational independence over monetary policy. Now it defines its mission as promoting “the good of the people of the United Kingdom by maintaining monetary and financial stability”. It sees itself as delivering three benefits: stable inflation, economic growth and the continuous provision of financial services. We should be so lucky!

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