Pensions can be a tricky subject for people to grasp. The fiendishly complex rules coupled with hard-to-pronounce and even-harder-to-understand technical terms can turn off even the most financially savvy.
But at the same time people have to understand their choices if they are to get on top of their pension decisions to turn their pension pot into a retirement income. These will be some of the most important decisions of their lives.
So, it’s good to see the Association of British Insurers (ABI) galvanising the industry to come up with some easier-to-understand terms to explain pension choices in retirement.
The ABI, though, has to realise for this to succeed, it has to take the whole industry along
At its recent long-term savings conference, it launched a consultation to gather industry and government views on its new guide to pension language. The guide aims to standardise the language used to describe retirement income options so customers can understand and compare products more easily, without having to decipher technical terms.
The ABI, though, has to realise for this to succeed, it has to take the whole industry along with it.
It’s no use if only ABI members make this change. That still leaves many providers and occupational schemes using outdated and complicated terms. It also has to bring government and regulators on board; they are, a lot of the time, the worst culprits, being the creators of some of the most technical and unapproachable terms.
Long and winding road
But, on the whole, I welcome the ABI’s initiative. There is no doubt we have to make pensions easier to understand, and, unfortunately, there are still some who like to hide behind its complexity. But having said that, we should be under no illusion that this is a simple – and single – solution to the problem of how people make these decisions. Instead, simplifying the language is just the first step on the road.
People need to understand what their choices are, and this initiative should go a long way to addressing that. But understanding the choices put in front of you doesn’t necessarily make it any easier to make the right decision.
Likewise, the pensions dashboard – due to launch in 2019, if not earlier – should help people get a more complete picture of their pension situation. It will give them details of (probably) most of the pensions they own, including their value.
It’s hoped that the government will also be able to feed in information on state pensions as well. If not, then it’s dubious how much real value the dashboard will add – for the majority of people, the state pension makes up the biggest part of their retirement income.
Realisation
It’s vital we work together to knock down these barriers. But although a dashboard and simpler language will add to the information people have, in a bizarre type of way, it might just make the retirement income decision harder, because people will better understand what they have to do and the significance of what they decide.
People will still need help and support figuring out the best solution for their retirement income – choosing the most appropriate investment strategy in the pre-retirement years, at the crux point when they start turning pensions into income and also throughout their later life so that they can manage and change their retirement income decisions to suit changing circumstances and objectives. And there is still a considerable way to go to achieving this.
The industry, regulators, and government need to continue to work together to make this happen. Introducing guidance, through Pension Wise, has been a positive step, and there is no doubt it can help some.
It’s vital we work together to knock down these barriers
But for most people, guidance alone is not enough and regulated financial advice will be necessary to give the support they need in making the best decision for their personal circumstances. All delivered with the peace of mind that should the advice be wrong, the member will have the right to recourse through the Financial Ombudsman Scheme.
Regulated advice is not without a number of challenges of its own – affordability, accessibility, trust and knowledge will all need to be tackled if it is to become the go-to solution.
But these can be overcome, and need to be if we are to offer people the necessary help to make the best retirement income decisions.
Andrew Pennie is head of pathways at Intelligent Pensions
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