Is disruption just around the corner?
Tom McPhailDirector of Public AffairsThe Lang Cat
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On the face of it, the UK’s financial advice services are in pretty good health. However, there are important areas that could be improved, and it looks like there’s disruption just around the corner.
The current state of playAround 700,000 pension plans were accessed for the first time in 2021/22. Of these, around 200,000 were simply cashed out for a lump sum; of those, the vast majority were for sums of less than £30,000. Of the rest, the bulk went into drawdown, a healthy minority into annuities and the rest were withdrawn as lump sums (UFPLS). According to the FCA, a third of pension plans accessed for the first time were by people who took advice. Given that elsewhere, typically only between 5% and 10% of the population pay for regulated advice, it would appear that retiring investors have a healthy regard for the importance advice at this pivotal moment in their lives.
Over the same period, around 150,000 people booked appointments with the Pension Wise guidance services. Pension Wise does a good job delivering generic guidance without being able to steer users towards specific solutions.
It’s also worth acknowledging the work of companies like Money Alive and Guiide, who deliver financial guidance and help within the current regulatory framework. They help bridge the gap between guidance and advice, taking people beyond the crude generic guidance of Pension Wise, but without the significant costs associated with a full advisory service.
All of this looks kind of OK, so what’s not to like? And what problems do the future generation of retirees face?
Lack of ongoing supportFirstly, there’s the question of ongoing advice and support. The Pension Wise service is a one-off engagement at the point of retirement, built in response to then Chancellor George Osborne’s highly political decision to introduce pension freedoms in 2015. It doesn’t provide ongoing support to retired investors. People can pay for ongoing regulated advice in retirement, but most don’t.
Pension providers and platforms offering non-advised drawdown are required by the FCA to offer investment pathways to help people make investment choices as they transition to retirement. But there’s currently no policy solution in place to help people manage their income withdrawals in retirement.
Concern over withdrawal ratesWhen we look at the FCA data, there are some frankly quite alarming findings: Regular withdrawals seem to be flowing out of drawdown plans at unsustainable rates. This is skewed towards the left-hand side of the graph, with the majority of pots valued at below £100,000 paying out an income rate in excess of 8%.
Only for pots valued over £250,000 do withdrawal rates of below 4% outweigh, by number, those paying out incomes of above 4%. But even then, there’s a substantial minority paying out over 6%. The data suggests the party can’t go on and one day, in the next decade or so, we’re going to wake up with a hangover as people start running out of money.
I’m not aware that anyone has done the exhaustive and expensive work necessary to combine this quant data with qualitative research to explore what’s going on, but I’d really like them to. The Treasury didn’t make the FCA’s job easy with the way it announced the pension freedoms, but equally, I don’t think the FCA covered itself with glory in how it responded.
“My house is my pension”The other aspect of retirement income advice that bothers me isn’t a pensions issue; it’s a housing issue. Typically, people have two chunky assets as they approach retirement: a pension and a house. When asked, financial advisers are pretty good at telling people what to do with their pensions. But when it comes to the wealth people have built up in their homes, financial advisers are less forthcoming, and I blame the FCA.
Equity release has been parked in regulatory silo with mortgages. When advisers are asked to help clients with their retirement income, it’s currently entirely fine to ignore their houses and concentrate on their pensions, ISAs and other investments. This makes no sense. The FCA should take a good look at how it regulates advice in relation to property wealth.
Upcoming developmentsIn the meantime, things are about to get a whole lot more interesting, for two reasons. Firstly, Pension Dashboards look set to become a reality in 2023/24. This will hopefully be a game-changer in terms of the visibility of pension assets and, consequently, people’s engagement with their retirement savings.
Secondly, the FCA has announced its intention to take another look at the boundary between advice and guidance. The regulator visited this territory a few years back with the FAMR review but failed to take meaningful action at the time. With legislation in train post Brexit to hand broader rule-making powers to the FCA, coupled perhaps with a political urgency to stimulate growth this side of the next General Election, this could be quite significant.
Thinking about the wave of people retiring over the coming decades with just DC pensions, inevitable market volatility and the challenges linked to retirement advice and guidance could fill me with dread. But it doesn’t. We’re seeing innovation across the industry and an unprecedented desire from the regulators to look again at the rules about advice and guidance. So I think there’s a bright future for retirement in the UK.
