19 March 2014
Free financial advice for all - Osborne’s surprise announcement could be transformational
The March Budget rarely contains very much of interest for savers and investors. This year was very different. George Osborne's package of measures to support savers in retirement, and to reform the pensions market, has the potential to be truly transformational, getting to grips with some of the major issues that have hampered those approaching retirement for decades.
In case you missed it, the headlines for savers and investors were these:
- A new government backed pensions savings bond will be launched, providing people over 65 with the chance to receive interest of 2.8% on a one-year bond (compared to current best rates of less than 2%), and 4% on a three-year bond (compared to a market leading rate of 2.6% that you could get today).
- An increase in the amount you can put into an individual savings account (ISA) each year, to £15,000.
- A merging of stocks and shares and cash Isas into one New Isa (NISA), and the introduction of new rules allowing you to transfer money from old accounts between cash and stocks and shares.
- An overhaul of the taxation of pension income in retirement, giving people more choice as to how they manage their pension pot in retirement. Most importantly, this will mean that buying an annuity is no longer something that most people have to do.
- Free face to face financial advice for people approaching retirement, to talk them through their options - paid for by a levy on the pensions industry.
Free financial advice for all
For me, it is the promise of free financial advice, combined with the greater flexibility around pensions, which has the potential to be truly transformational. Currently, millions of people sleep walk into annuities when they retire, as it's presented to them as the only reasonable option. Worse still, many fail to shop around, and don't realise that they could have got much more income if they'd only looked around for the best rates.
Although most people approaching retirement are desperate for some help and financial advice, the vast majority never get it. For many, this is because they don't trust financial advisers to do the right thing, while others simply don't have a large enough pension pot to get most financial advisers interested.
It's yet to be seen exactly what the government's promise of free financial advice at retirement will mean. But if it's executed well, it has the potential to not only ensure that most people get the best possible start to their retirement, but also to increase competition in the pensions market, and in time, improve confidence in the financial advice industry more widely.
The more people that get good financial advice, the more people will become advocates for it. Furthermore, with greater numbers of people actively managing their pension pots in retirement - even if it's with the help of a financial adviser - there is the potential to improve the financial literacy of the UK as a whole, and to create more of an investing culture here.
My American father-in-law has actively managed his pension his whole life, and still had a large amount invested in equities until very close to his retirement. Working with a good financial adviser, he has a much better understanding of how and where to invest than most people in Britain his age.
If more people can get the support they need to more actively manage their finances - not just at retirement, but throughout their life - it will up the pressure on financial services companies to deliver a better deal for their customers. Today, too much of the profit in insurance and banking is won by apathy and misunderstanding on the customer's part. In the future, I hope they won't be able to get away with that.
Credit for Steve Webb
Although George Osborne got to deliver the punchline, I can only assume that Lib Dem pensions minister Steve Webb played a big part in shaping today's announcements. In his four years as pensions minister, he has achieved more than every pensions minister over the last 20 years put together.