Pension scheme members need more guidance if they are to make the right decisions about retirement. Can the IFA market plug the gap?
For the first time, the retail and institutional world will directly compete with each other as savers are able to choose between an annuity on the one hand, a buy-to-let property on the other and everything else in between.
Now that people no longer have to buy an annuity, there will be more competition at the decumulation stage of the retirement journey, but the changes don’t end there. With many in the industry talking about ‘pensions bank accounts’, pensions will also have to stand up against other savings vehicles, such as ISAs.
With such a vast array of options, it’s hard to see how retirees are going to make the right decisions. For instance, asks independent trustee Richard Butcher, the managing director of PTL: “How can you realistically compare an annuity with a buy-to-let? There is no mechanism for doing that.”
Nigel Aston, European head of defined contribution at asset manager State Street Global Advisors, agrees that this could cause a problem. “Freedom and choice legislation hasn’t suddenly created a population of self-empowered, interested, financially savvy people.”
How can you realistically compare an annuity with a buy-to-let?”
He continues: “All the research points to the fact that they can make really good decisions… but they can only do it when they’ve been given some sort of guidance, and better products.”
Unfortunately, the guidance guarantee, specifically set up to help consumers understand the new, bewildering array of choices they are faced with, is unlikely to cut the mustard. This is especially true since by its very nature, the service cannot advise people on the right thing to do.
Mike Spink, a DC consultant at advisory firm Spence & Partners, argues that the guidance guarantee’s main benefit will be steering people towards independent financial advice.
“Hopefully when that session is finished, you might at least, if nothing else, have a fairly clear understanding that you really ought to take advice now.”
Expecting the independent financial adviser market to fill the advice gap may be short sighted. Traditionally, IFAs have been focused on the high net worth and ultra high net worth sectors.
The introduction of the retail distribution review, which forced IFAs to move to a fee, rather than commission-based, approach has made regulated advice more expensive.
Small may not be beautiful
Not only can we expect the average retiree to balk at the cost of advice, it seems that the advice market itself is not overly interested in courting people with smaller pension pots.
With an average pot size of just under £30k, appetite from the adviser market seems likely to be low.
This advice gap could cause problems. “It’s a very dangerous game because you do need someone to sit down with people, whether they have a £40,000 pension fund or a £400,000 pension fund,” says Ammo Kambo, a divisional director at wealth management firm Brewin Dolphin.
Aston agrees: “The danger is that without good products and good governance and the right help, people may just take the money out and put it somewhere that’s less tax benign and less growth orientated.”
There are some good IFAs but there are also a lot of cruddy ones”
Butcher argues that even if the adviser market is keen to fill the gap, it may not be up to the job.
He says: “There are some good IFAs but there are also a lot of cruddy ones. I just don’t think there are enough of them. But even if they were all brilliant, there are more than 60 million people in this country.
“A million of them are going to be hitting retirement each year and asking for help in the comparison of buy-to-let against ISAs against an annuity against drawdown. That’s an awful lot of work.”
Tim Banks, managing director of asset manager AB’s pension strategies group, thinks that to be truly attractive to members, advice will need to be embedded within solutions.
He says: “We’re rolling together the members of workplace pensions schemes, and individually advised savers into a world that exists sub-75 basis and I think the emphasis is going to be very heavily – as those two worlds come together – on non-IFA-advised solutions that contain embedded advice.”
An area of growth
Despite this, the IFA market is gearing itself up. Kambo explains: “Any half-decent financial planner worth their weight has been looking at pensions. Any adviser can see that retirement planning and pensions generally is a growth area in terms of the advice needed by the general public.”
And in the longer term, as the minimum contribution rates for auto-enrolment increase and pot sizes become larger, independent financial advice is likely to become more popular.
Despite this, the IFA market is gearing itself up”
This will further force the issue of choice, value for money and user-friendliness in both the retail and institutional sectors, as consumers armed with advice look to pick apart product offerings to make sure they get the best deal.
And if the institutional market isn’t sufficiently competitive, it could find itself in trouble.