Yes. Some data suggest that the optimum number of choices is four. If there are 20 choices in a mobile phone shop, people walk out without buying one. If there are not enough, they do not ever have a phone. We need enough choice to see a difference, but not so much that we are completely baffled by our options.
I think that we are hoping that the market will innovate certain things that will mean it will not be a choice of annuity into which we will opt for life that will give the same amount for the rest of our lives or some kind of draw-down in which we keep spending our pots and hoping that they will last. I suspect that we will end up with people taking some kind of fixed guaranteed income, so that no matter how long they live they will have the quality of life that they want, but they might be able to choose to use some of the rest of their money to fund travelling in early retirement, paying off the mortgage or doing something for their children or grandchildren. Perhaps we could have an annuity that varies, which is higher at the start, dips and then goes up at the end when people need care fees.
I think that we are hoping that most people with a small or medium pension pot will not be faced with a blizzard of hugely complicated financial products, but that there will be options that they can match to their personal choice for their retirement. That is where high-level guidance is important.
People need to understand that there are different things out there for them to look at. I suggest that they do not just immediately accept the annuity offer that their pension provider makes. They should at least think about what would suit their lifestyle, what their existing financial position is and what they and their spouse want to do. That is where guidance is very important. It is very different from financial advice, which might be, “Take out this annuity with this provider, on these terms.” I suspect there is no way to get such specific guidance, and we should never want such specific guidance. That would be a horribly expensive programme, which would only be appropriate for a relatively small band of people.
Those who retire with huge pension pots should already be taking such advice and can afford to pay for it. Those with small and medium pots will not have that advice and, I suspect, in many cases will not need to spend thousands of pounds getting advice; it would not be a worthwhile use of their money. It is people in the band in the middle who perhaps could really benefit from expensive financial advice. How we get that guidance to work, and when people receive that guidance, is very important.
I think that we shall see a move away from retirement at one’s 66th birthday, or another fixed date. People may gradually step down to working four, then three days a week. They will have small amounts of income coming in from different sources. Lifestyles will vary, and they will start varying, perhaps, in people’s mid-50s. Some people will work full time right into their 70s. Possibly, they will not want advice at the age of 65 and a half or 66; they will need to think, “Do I want my pension fund to start de-risking my investments now, at age 55, or would I rather they did that for part of my pension fund, so that I know that I will get something when I am 66 but I will keep some higher-risk investments to get a higher yield for a few more years?” When we make that guidance available, and when people can choose to receive it, will be a key aspect; otherwise, people will end up in a default fund that does not suit what they plan to do with their own hard-saved income.
It is clear that the change is a very positive step in the right direction. If people are responsible enough to save for their retirement, I cannot see them frittering the money away on the proverbial Lamborghini when they hit 66. This flexibility will give people the chance to have the retirement that they want without being ripped off by the annuity market.
Some of us had wrestled with the question of how we could fix the broken annuity market. I had come up with the suggestion of splitting the pension fund industry and the annuity market, which did not meet with much approval in the industry. But what the Government have done is far more radical. An annuity may be the right thing for many, many people; but for many, it will not. Now there will be no compulsion or expectation for people to take out an annuity when they hit retirement age. That has to be the right answer, and I fully welcome the Bill.
3.53 pm