Jonathan Watts-Lay, Director, WEALTH at work, comments on what is changing and what it means.
“The FCA’s new rules on pension ‘wake up packs’ – the information that an individual receives from their pension provider before accessing their pension fund, comes into effect on the 1 November 2019. The new packs aim to make it easier for individuals to review their current financial situation, understand their options and any risks, and hopefully make better retirement decisions.
Currently Pension ‘wake up packs’ are provided to customers when they are due to retire. They tend to be large, often confusing documents, which are sent out to customers 4-6 months before their intended retirement date, but the rules are changing.
From the 1 November 2019 pension providers have been told they have to significantly reduce the size of the packs, and increase the frequency. From this date, they must be sent out once the individual reaches the age of 50, and then every 5 years after that until the pension is fully cashed in. They will also need to be sent just before someone retires, whenever they request a retirement quote, and any time they take money out of their pension, with no more than 5 years between each pack, until the pension pot is empty.
The new packs will also be different in that they have to include a one-page summary of the pension, information on how to access the government’s Pension Wise service for guidance and an explanation of the advantages of shopping around when purchasing a retirement income option (e.g. an annuity or income drawdown) and how to do this. It will also need to include a single page identifying the main risk factors relevant to these options and highlight warnings in relation to each of these risks. This will take into account an individual’s age, proposed retirement date and amount of pension savings, and will cover things like tax issues, pension scams and investment risk.
Freedom and choice in pensions, giving individuals the right to do what they want with their pension, has been very popular. However, in practice, without the expertise of how to manage this, it can be easy for employees and pension scheme members to make poor decisions which can lead to a permanent dent in their retirement income.
We have seen hundreds of thousands of employees and members in our financial education seminars, who simply don’t understand how to manage their income in retirement, and we have also all heard many stories of individuals who have ended up paying huge sums in unnecessary tax, or even losing their pension to scams.
Hopefully the simplification and increased frequency of the ‘wake up packs’ will encourage individuals to take an interest in their pension and retirement earlier. The new packs should be significantly easier to understand. The packs should also make it easier for individuals to decide how they are going to manage their money in retirement, hopefully be wise to potential mistakes, and encourage them to put more aside for their retirement.
Something had to be done, and these new ‘wake up packs’ are a good step in the right direction. However, it is still not enough. Individuals need financial education early on in their careers so they understand the value in starting to save early for retirement, and the huge difference it makes to the amount that can be saved. Financial education and guidance, and regulated financial advice, are also needed when approaching retirement to encourage individuals to look more holistically at all their finances, and not just their pensions, to ensure they make informed choices. Many employers are now seeing the benefits of putting services like this in place for their employees throughout their career. This should lead to a workforce who are better equipped to deal with the many complex financial issues that they may face throughout their life, and especially at the crucial point of accessing their retirement savings, leading to improved outcomes for all.”