The FCA Business Plan for 2017/18 is due to review non-advised drawdown sales as part of the Retirement Outcome Review, writes Fiona Tait, raising the question of whether people should be forced to take advice.
Analysis by the Financial Conduct Authority shows that, at one point last year, nearly a third (32%) of individuals setting up drawdown plans did so without taking advice, compared with 3% two years ago. Pension freedoms are undoubtedly having an effect but is this a good thing, or should people be forced to take financial advice before taking on the complexity of income drawdown?
Personally, I do not believe people should be forced to take advice when entering drawdown – it is after all their own money. There are, however, extremely good reasons why it would be beneficial for them to do so, especially if they are intending to take regular income.
Running an income-producing portfolio requires a degree of financial knowledge and expertise that is beyond the majority of lay investors. In the case of a pension, it also means making a number of key decisions that can impact on living standards for the rest of that individual’s life.
These decisions are best made with the help of a professional and, ideally, one with access to specialist analysis tools that can assess the probability of success of alternative strategies. There is, after all, quite a lot that could go wrong.
Running out of income
For most people the ideal scenario would be for their funds to provide them with enough income to live on and run out on the day they die. To achieve this they would have to know exactly when they are going to die and how the value of their portfolio will change between now and then. Neither is an exact science.
Financial advisers not only have the experience of having dealt with many individuals in this situation, they also have access to information and modelling tools that help to make a more accurate prediction. They can also look at ‘what if’ scenarios and crash test the impact of potential monetary losses – for example, a significant fall in stockmarkets.
Nobody should plan their retirement income stream without access to support of this kind. Furthermore, this should not be a one-off exercise as personal circumstances, objectives and external markets will all change over time and retirement income plans must react and adapt to those changes.
One of the differences between a long-term and a short-term savings vehicle is the need for investment returns high enough to overcome the cumulative effect of inflation. While it might be acceptable for an ISA to invest 100% in cash, no pensions professional would advise that a pension fund should do so.
Unfortunately, most pension plan-holders are not used to investing in equities and show a marked preference for cash. Many of their pension funds will have been built up within workplace pensions where, even in DC arrangements, they are unlikely to have made the investment decision themselves.
Increasing investment risk
Even supposing a non-advised drawdown pensioner was able to put together a sophisticated enough portfolio to achieve all of their retirement goals, they may not know which funds they should cash in to provide their ongoing income.
Left to themselves, an inexperienced investor is likely to do one of two things – either take income evenly across all of their investments, as happens with people using multi-asset funds, exposing them to sequencing risk. Or, they will cash in the investments they think did not do well in order to have more of the ‘good’ assets in their pension plan – potentially selling and buying assets at exactly the wrong time.
The regulator’s review is likely to show that drawdown is complex and different users will need to use drawdown differently to achieve their objectives. What might be right for one person could be incredibly risky for another.
I do not recommend the government legislate to prevent non-advised drawdown but I do believe there should be a mechanism that helps people to understand the pitfalls of going it alone. A mandatory referral to a free guidance service such as Pension Wise, with ongoing effective referrals for advice where needed, could be one way of achieving this. Another is for employers to provide access or direction toward quality financial advisers.
Either way, our task as an industry is to give people confidence and belief that their actions, after taking advice, are likely to deliver the outcomes they want. That way, if and when they are directed towards an adviser, it will be seen as a positive and valuable thing, not a sales opportunity or tiresome piece of government interference.
Fiona Tait is technical director at Intelligent Pensions
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