6th January 2015

Aviva: ‘Freedom and Choice’... will liberty mean poverty?

The countdown is well underway. Although still subject to consultation, the Government’s new pension rules are due to come into effect in April next year – as few of you will need reminding – and the debate over the likely consequences shows little sign of slowing down.

As consumers take even more responsibility for funding their own retirement, they face new challenges. More choice is good. But more choice could also mean more opportunity to make wrong choices as well as right ones. Could liberty lead to poverty?

The dilemma boils down to this: how can consumers make the most of their money without finding themselves short of cash in their later years?

The issue of balancing practical retirement planning with greater freedom of choice will be a continuing area of focus for all of us within the financial industry over the coming years. In 2015 the first retirees will step out into the ‘new world’ of pensions and their reactions will be carefully monitored as we consider how to support people leading up to retirement in a transformed environment.

A note of caution

The announcement of the changes was greeted positively enough. Early research* indicated that nearly two-thirds of people agreed with the statement “having control over how you spend your pension pot is a good thing”.

But perhaps even more tellingly, 61% said that as the pension rules were loosened, people

would need to show greater restraint in coming years to avoid running out of money. This would seem to encourage the view that caution will not be entirely abandoned in the face of growing choice. It’s hard to imagine that many of those 61% will be rushing out to buy the infamous Lamborghini spoken of by pensions minister Steve Webb. 

Looking further down the bill 

Of course, ‘spend vs save’ isn’t the only bout on the bill of post-budget debate. Annuity vs income drawdown has drawn almost as much attention, with annuity viewed in some quarters as a contender whose best years may be behind it. 

Aviva’s analysis seeks to provide a more objective view of the annuity and drawdown choice. We don’t aim to show one solution is better than another, but rather to demonstrate that every retiree must consider carefully how best to fund their retirement. Like many of the questions posed in the light of the April 2015 changes, there is surely no simple answer to the issue of which ‘retirement choice’ will perform the best. It’s up to all of us to help our customers and clients to find solutions that fit their own circumstances.

More information

Bringing the pension reforms a step closer – you may wish to direct clients to our summary of the April 2015 changes.

Making good retirement choices – an investment special report from Aviva, containing more details

on the research mentioned in this article. 

*Research carried out by ICM Research on behalf of Aviva following the March 2014 Budget.

Retirement