Regulated advice is the best option for members, trustees, employers and the future success of pen sion freedoms argues Andrew Pennie, marketing director at Intelligent Pensions
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People are largely in favour of pension freedoms but just over a year in, we are already seeing people achieving poor outcomes and being targeted by scammers. The freedoms have given choice and opportunity like never before but with that comes increased risks and complexity.
Current guidance and communications are not delivering the necessary support and engagement resulting in many making poor and inappropriate choices with their pension, with a lack of individual personalisation. The Government has rightly identified the need to improve guidance and advice and have wasted little time making changes in a desperate and determined bid to ensure pension freedoms are a success.
Recent FCA data has shown that fewer people are now shopping around for the best retirement solution; an undoubted step backwards. The data also showed a third of annuity purchases and fifty percent of drawdown purchases were made after receiving regulated financial advice.
It is perhaps not surprising that more advice was sought for the more complex drawdown option but to think that one in two drawdown investors has the knowledge and skill to manage their drawdown fund throughout retirement is absolutely fanciful and I would guess the true figure is less than three percent and probably closer to one!
In the Chancellor’s infamous 2014 Budget he promised DC members would receive ‘free, impartial, face-to-face advice on how best to get the most from the choices they will now have’. A bold statement that unfortunately wasn’t matched in terms of execution, what we got was more guidance in the form of Pension Wise, delivering similar guidance to that already delivered by employers, schemes, providers and a host of web sites. What’s more, take up of the Pension Wise service has been poor with only 17% of people accessing the service. Not surprisingly, questions were being asked and the Government has been quick to react.
The Government and the regulator are trying to make guidance and financial advice deliver for consumers – it is the stated objective of the current developments and key consultations.
So why this sudden realisation that advice trumps guidance and is a significant missing piece of the jigsaw to improve DC member outcomes? There are two answers, the first articulated in a recent DWP review which stated their newfound understanding of how difficult it is to make the right pension freedom choices. The second becomes clear when you understand the differences between guidance and advice:
- Guidance can give you information and choices – what you could do. Whereas advice will give a personal recommendation – what you should do
- With guidance you proceed at your own risk. With advice you have full FCA regulatory protection and recourse if the advice is wrong
It doesn’t take much to realise that regulated advice is the best option for members, trustees, employers and the future success of pension freedoms.
The tricky part is how to get more people to pay for regulated advice? The FCAs Financial Advice Market Review identified affordability and accessibility as two key areas to tackle but it would be remiss to ignore trust and understanding as major obstacles of both financial services and the regulatory compensation scheme.
The Government has streamlined its guidance service into a single body and will deliver a pensions dashboard, but it’s hard to see how these initiatives will help increase the use of financial advice or improve member outcomes.
Direct steps have been taken to improve employer facilitated advice, increasing the HMRC allowance to £500 and indicating employers will be given safe harbour when pointing their members to regulated advice. This should see an increase in supply but will it drive up demand when a limited supply of quality services are already available within the previous £150 allowance – price is still a barrier.
The regulator sees automated advice as an advice gap solution, but care needs to be taken as research shows people don’t want it and prefer human interaction - 59%. Secondly, as a sole means of advice, without navigation and challenge by an expert, it may lead to poor inputs and outputs! Despite a limited number of specialist advice companies willing to deliver an affordable and interactive solution, this is where the best solutions will come from to deliver better member outcomes.
Pension freedoms is a work in progress and regulated advice has an important role to play. More people will benefit from expert advice and the time is right for everyone to get behind financial services and improve people’s knowledge and understanding.
Andrew Pennie is marketing director at Intelligent Pensions