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Pension reforms- with freedom comes responsibility

Pension reforms- with freedom comes responsibility

Category: Pensions

Updated: 21/03/2014
First Published: 21/03/2014

This article was correct at the time of publication. It is now over 6 months old so the content may be out of date.

Revelations in this year's budget will probably have delighted both pensioners and savers, but before you get too carried away with your new found financial freedom, take a minute to consider all your options.

For pensioners, hearing that you will soon be able to access your entire pension pot as a lump sum, removing the necessity to purchase an annuity, will have come as a nice surprise. However, there is a lot of responsibility involved in this, and your decision can ultimately mean the difference between a comfortable retirement and a struggle.

In his speech Chancellor George Osborne said: "People who have saved throughout their lives, saved for a pension, these are responsible people who are capable of making decisions - with good advice - about their future," and this should be predominantly true. However, it is not financial recklessness that could be the problem, but instead financial naivety.

There is obviously the fear that people could "blow" their entire pension pot in one go and end up relying on state benefits, but, even the astute consumer could make the wrong decisions through lack of knowledge.

In a bid to counter these fears the Chancellor also offered the 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."

The Institute of Financial Planning (IFP) recognises this need for a set of clear goals to be established, as well as the need to review these aims regularly. They also feel that it needs to be clear whether the 'face-to-face impartial advice' will be fully regulated advice or not.

Steve Gazzard, chief executive of the IFP, said: "The Budget changes give consumers the ability to access their accumulated savings and investments much more flexibly in future. However, the need for them to understand the long term implications of such decisions is essential.

"The process a Financial Planner takes clients through, which includes cashflow forecasting and various 'what if' scenarios, supports this understanding in a way that a single moment of time piece of advice can never achieve".

Savers were also given more choice as to where they can invest their hard-earned cash, led by the introduction of the NISA, merging both stocks and shares and cash ISAs into one with an overall annual limit of £15,000. A Pensioner Bond is also on the cards and is set to offer leading rates of interest for those over 65.

These savings products will be extremely welcome but they increase the need for investors to be fully aware of the risk/return factor and the implications they could have on their finances.

With freedom comes responsibility, and consumers need to ensure they have done their research and got the independent financial advice they require before making any large decisions. Used correctly these new changes could open up some great opportunities to both pensioners and savers, and many will be happy to feel in control of their own future at last.

What next?

Many pensioners may still choose an annuity as their income of choice, take a look at annuities here.

You may want to consider putting your capital into property, take a look at some BTL deals here

There's still time to invest this year's ISA allowance tax free – see what rates you can get here.

Disclaimer: Information is correct as of the date of publication (shown at the top of this article). Any products featured may be withdrawn by their provider or changed at any time.