The industry is split over whether consumers should be urged to seek retirement advice regardless of the size of their pensions, following the Financial Conduct Authority’s (FCA) retirement outcome review, which found more than half of pots were encashed – many to be invested elsewhere.
The review, published on 12 June, said 53% of pension pots accessed by consumers since the pension freedoms were fully encashed, though 90% of those had a value of below £30,000.
It also found more than half (52%) of withdrawn pots were moved to other savings or investments and warned this could result in “consumers paying too much tax, missing out on investment growth or losing out on other benefits.”
As was expected, drawdown became a popular choice post-reforms. However, consumers are increasingly accessing drawdown without taking advice, the FCA found.
In order to address these issues, the regulator is assessing whether additional protections should be put in place, as well as exploring ways to improve competition in non-advised drawdown.
It also said it wants to introduce tools and services to help consumers understand their options, building on existing initiatives such as Pension Wise.
‘Strong case’ for financial advice
Technical connection head of pensions strategy Claire Trott said the review demonstrated there was a strong case for personalised financial advice for all.
She said: “Access to smaller pots is clearly still attractive and in many cases makes sense, but the fact that a lot of these funds will just end up in a savings account with little or no interest again strengthens the argument for advice to maximise returns in line with the client’s risk profile and future income needs.”
LV= managing director of life and pensions John Perks agreed, saying professional advice was “the best way to ensure people are able to make the right decisions in retirement”.
Similarly, Old Mutual Wealth head of retirement policy Jon Greer felt the findings showed “consumers simply cannot afford not to take advice at the point of retirement”.
He supported the FCA’s proposals to look closely at consumers who access drawdown without taking advice, as well as improving access to impartial guidance, saying: “The new financial guidance body could play a key role in directing people to advice and we believe this should be a specific part of its remit.”
Just director Stephen Lowe too was concerned about savers moving their money into less tax efficient investments. However, he felt Pension Wise was a valuable service and called for it to be made “the default choice” for those accessing pension savings, much like auto-enrolment for savers.
‘Paternalistic interventions’
However, Hargreaves Lansdown head of policy Tom McPhail said the FCA report looked like “a regulatory cry for help” and questioned the “paternalistic interventions” the regulator seemed to be taking.
“They have expressed concern about a lack of competition in the market place, yet the majority of the measures proposed here seem likely to stifle competition; better investor engagement is likely to lead to better competition,” McPhail said.
He said he would like to see more emphasis placed on helping investors make good decisions for themselves, adding: “A savings commission to build consensus across industry and policymakers looks an increasingly good idea.”
Informed Choice IFA Martin Bamford agreed people had to make their own decisions providing they have all the information available and understand the potential risks, and shouldn’t be forced into taking “expensive advice”.
“As an adviser I know I’m expensive,” he said. “I’m good value for the right people, but for somebody with a smaller pension pot I’m terrible value, if they had to come and see me, then that’s a really bad outcome for consumers.
“I think this has to go down the guidance route, it has to be based on risk warnings,” he said.
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