Advertisement
UK markets close in 7 hours 28 minutes
  • FTSE 100

    7,954.18
    +22.20 (+0.28%)
     
  • FTSE 250

    19,783.77
    -26.89 (-0.14%)
     
  • AIM

    741.86
    -0.25 (-0.03%)
     
  • GBP/EUR

    1.1683
    +0.0014 (+0.12%)
     
  • GBP/USD

    1.2607
    -0.0031 (-0.25%)
     
  • Bitcoin GBP

    55,981.74
    +773.43 (+1.40%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • DOW

    39,760.08
    +477.75 (+1.22%)
     
  • CRUDE OIL

    81.74
    +0.39 (+0.48%)
     
  • GOLD FUTURES

    2,216.50
    +3.80 (+0.17%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • DAX

    18,499.91
    +22.82 (+0.12%)
     
  • CAC 40

    8,233.53
    +28.72 (+0.35%)
     

More engagement needed if pension reform is to work properly, experts say

LONDON (ShareCast) - The new pensions reform could lead to a number of workers being rushed into making a decision over their retirement plans, industry experts said on Thursday. From 6 April, under the government's pensions reform, people aged 55 and over have been given the green light to withdraw any amount they wish form a Defined Contribution scheme as well as have access to free guidance from the government's "Pension Wise Service".

The reform came under severe scrutiny after a number of analysts suggested that people might rush into withdraw almost all of their available funds to spend them on luxury items such as cars of cruises, raising the possibility some might find themselves with no savings at all in the near future.

However, while official data showed that in the first two weeks since the reform was introduced the number of people who have withdrawn a lump sum from their pension pot was limited and some of those who did used the fund to repay mortgages, some issues had not yet been addressed.

"In the past you didn't need to be engaged to know what you would do with your retirement funds," said Jamie Jenkins, head of pension strategy at Standard Life (LSE: SL.L - news) . "Now (NYSE: DNOW - news) you need to be engaged and that's the big challenge we are facing to ensure customers make the right decisions." Conversely, however, the need to be engaged in retirement has also become a surplus for a lot of workers, who are automatically enrolled in a pension scheme by their employers.

ADVERTISEMENT

According to official data, only 50% of the workers eligible for the scheme have so far been enrolled, while there's approximately 1m of employees, mainly small businesses, that have still not joined the programme.

"Encouraging people to take control of their retirement funds is great but the way the reform was introduced before the dissolution of parliament was recklessly fast," said Tom McPhail, head of pension research at Hargreaves Lansdown (LSE: HL.L - news) .

"The coalition government is dismantling the architecture of the pension system and has broken the five pension-related promises it made in 2010." Speaking at a business event in London on Thursday, McPhail said that only 6% of those eligible to withdraw their pension pots had done so in the two weeks since the reform was introduced, with 87% wanting to use drawdown and the remainder decided to invest in an annuity.

Analysts believe the number of people who decided against withdrawing their pots was a clear sign that a lot of workers had not received the required informations needed to make a choice.

"We must engage people very early in their careers," said Jenkins, adding that the scheme should be designed to encourage employees to make a choice rather than to wait for someone else to do on their behalf.

His words were echoed by Helen Dean, executive director of product and marketing at NEST.

"People will be presented with a wide range of choices and that could be an issue," she said.

"Therefore ensure that financial education and disclosure are necessary but they will not solve the whole problem.

"We'll need high quality default products to help people make the right choice." Furthermore, with the number of over 85-year-olds set to double in two decades and to treble in 30 years, a lot of people might have to be even more careful about the choice they make once they become eligible to choose whether they want to withdraw their pension or not.

"Liberalisation was needed but it's gone too far," added Jane Vass, head of public policy at Age UK, Britain's largest charity dedicated to help elderly citizens.

"People would engage more if they had to engage less and if their retirement choices were made easier to understand." McPhail agreed that simpler choices, rather than a comprehensive financial education was of paramount importance.

"Financial education is pointless, while delivering useful information is critical," he said.

"Education won't work financially and it will only be a huge waste of money."