Articles - Retirement Income advice

Advising clients in and approaching retirement is a complicated business, and it is no surprise that the FCA have chosen to focus on this area via a thematic review. It does after all tick every box in their well-known list of concerns. We know the regulator is concerned about this following the considerable activity in the area of defined benefits transfers (DBTVs), however similar concerns were also laid out in the original drawdown guidance paper, Regulatory Update 55 (RU55), which was very much drafted with annuities in mind.

 By Fiona Tait, Technical Director, Intelligent Pensions

 Put simply, advisers recommending a flexible income solution (drawdown) had to justify why a client wasn’t choosing a guaranteed income.

 Since pension freedoms, drawdown has become a far more common choice than annuities, but it is still very much viewed by the regulator in the context of the guaranteed income the client could have had. This is entirely reasonable in the case of defined benefits clients, who are giving up guarantees to access income drawdown, but in the case of defined contributions, drawdown could be seen more as a continuation of their current strategy. The client is already invested, they are simply choosing to remain so.

 Nevertheless, there is a requirement to consider all the options available and many advisers still feel the need to include the reasons why they aren’t recommending an annuity in their reports. I strongly believe most clients would rather their reports focused on what we are recommending than something we are not, but the regulatory hangover remains.

 High risk products
 Drawdown clients not only remain invested after they start to access their funds, but they are also very often invested in a SIPP, which is another ‘buzz word’ for the FCA. SIPPs provide access to a much wider range of funds than personal pensions and this includes the option to select unregulated investments, some of which are highly unsuitable for providing a reliable income stream. In the worst case scenario the investments may prove to be fraudulent, and the client’s whole pension fund could be lost.

 Furthermore, unregulated investments are not protected by the FSCS and there will be no redress unless they can be traced back to an authorised transaction which can be held to be at fault. This has led to a number of cases where the ultimate culpability has been determined by third parties such as FOS or even through court. Both advisers and clients should think very carefully before investing their pension in anything other than UK regulated funds.

 Consumer understanding
 Income drawdown is usually seen as a very complicated product and, in comparison with an annuity, it undoubtedly is. Annuities are ‘once and done’ transactions, and do not require any ongoing decision making.

 Drawdown could be seen simply as a ‘pension bank account’, however there is the added requirement to consider income sustainability. Clients are well aware that if their current account has nothing in it they will have no money to spend, unless they choose to get into debt. With drawdown however the point at which their money runs out could be well into the future and it takes considerable skill to predict when and if this will occur.

 It is necessary therefore to provide the client with a picture of what could happen, and to revisit this on a regular basis. Cashflow charts are not a regulatory requirement, but it is difficult to see a better way of illustrating the issue.

 Charges and value
 The cost of products and advice is very dear to the regulator’s heart, mainly because it has such an impact on the client’s future, but also because it is something that can be definitively measured. Recent publications have reiterated concerns that clients could be paying for ongoing advice service which are not needed.

 In the case of income drawdown there is no doubt that both withdrawal and investment strategies need to be reviewed and adjusted as circumstances change. Cashflow plans are based on our best professional assumptions, but they are assumptions and reality will undoubtedly turn out to be different. The regulator accepts this, however they remain concerned there could be a bias towards the solution which generates additional fees rather than one which doesn’t.

 Vulnerable clients
 Last, and certainly not least, drawdown clients are by definition over age 55, and often much older, which increases the chances of their being vulnerable clients. Age is in itself not an indicator of vulnerability, but both physical and mental abilities tend to decline as we get older and the probability of issues which lead to vulnerability is therefore higher with this group of clients.

 We are therefore faced with a perfect regulatory storm. There is undoubtedly a need for professional advice for clients who want or need to start accessing their pension savings, but advisers must keep in mind that the regulator will continue to ask questions about their advice in this area, and it is probably a good thing that they do.


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