Financial advisers should be in the perfect position to give advice as people head towards pensionable age. But are you reaching the target audience?
We all know there is an uncertain future, what with Brexit and US President Donald Trump in power. But some things are crystal clear – people are living longer and need more money for retirement.
Responding to the Office for Budget Responsibility’s Fiscal Sustainability Report, Dean Hochlaf from the International Longevity Centre – UK, says: “Demographic pressures are set to continue to dominate the agenda, with health, pension and adult social care spending all set to rise as a proportion of total GDP. We need a serious public debate in the UK about what services individuals should expect and where the responsibility for providing and financing them lies.”
The government is trying to encourage people to save for old age and to invest in a pension. Alongside that, however, it has increased the freedom with which people can use that pension pot.
Three years on from the launch of that freedom, new research from Zurich UK shows a third of people using drawdown (32%) to fund their retirement have no investment experience, yet two in five (41%) of these have not received either financial advice or guidance.
Almost half a million (430,000) people are taking advantage of new pension freedoms to draw down their retirement savings, yet the highest proportion have never actively invested in the stock market. Despite being first-time investors, tens of thousands have not sought regulated financial advice or guidance, even though they have an average drawdown pot of £153,000.
430,000 people are taking advantage of new pension freedoms to draw down their retirement savings
The study – the largest of its kind into consumer behaviour in drawdown – warns that a lack of advice and guidance could leave retirees at risk of running out of money in retirement. Poor decisions in drawdown can lead to consumers taking on too much risk, missing investment growth or making unsustainably high withdrawals. Women in particular were more likely to be first-time investors, potentially putting them at greater financial risk (41% vs 29%).
According to Zurich, the “first-time investor gap” is being driven by a lack of consumer understanding of drawdown, with almost half of novice investors who had not received advice saying they thought drawdown would be simple (47%). A further third (29%) claimed they were confident in their investment decisions, despite having no previous experience of actively investing.
The research also reveals that one in 10 UK adults not getting advice rely on search engines to help them navigate the complexities of drawdown, while one in five (20%) look at newspapers and magazines. Pension firms were the leading source of guidance for a third (35%) of consumers, though 44% of all those in drawdown confessed there is nothing that would prompt them to get advice or guidance.
Tackling the issue
The PFS is in the process of establishing a representative industry forum, to be known as the Pensions
It will include financial advisers, actuaries, scheme administrators, providers, insurers and consultants with direct experience of both individual and workplace pensions. Initial meetings have taken place, with the following in attendance:
- Steve Webb, Royal London director of policy
- Margaret Snowden from the Pensions Administration Standards Association
- Simon Chrystal of Workplace Solutions
- Rory Percival, PFS board member, consultant and former Financial Conduct Authority (FCA) technical specialist.
They will be joined at future meetings by Sue Lewis from the FCA’s consumer panel and Michelle Cracknell from The Pensions Advisory Service. Both the FCA and The Pensions Regulator will also attend meetings as technical observers, maintaining their independence but informing the board as appropriate.
The primary purpose of the board is to bring together representatives of the various stakeholders working within the wider pensions and advice community, as well as consumer representation, to build a principle-based framework that advisers can support, and consumers can both recognise and access.
Following the introduction of pension freedoms, the PFS recognised the need to create such a forum to bring all stakeholders together. The taskforce will be fully aligned to the purpose of the PFS by supporting and driving professional standards for the ultimate benefit of the public; its success will ultimately rest with the delivery of meaningful and positive outcomes for consumers.
Keith Richards, CEO of the PFS, comments: “The retirement landscape continues to evolve, with professional advice playing a crucial role in meeting consumer financial planning needs. The pace of change has led to some areas of concern and unintended consequences for consumers, especially those entering drawdown without having consulted a professional adviser or Pension Wise guidance. The recent high-profile British Steel fiasco has also thrown into question adviser conflicts of interest for defined benefit (DB) transfers, now impacting professional indemnity (PI) insurers’ confidence.
“It is essential that we introduce initiatives that address these rising areas of concern, via sector-agreed good practice and a voluntary code, which consumers and PI insurers can rely on. Protecting the excellent progress of the profession and the growing financial planning needs of the public is at the heart of the taskforce’s purpose.”
With the introduction of pension freedoms in April 2015, pensioners, looking to boost their savings and attracted by high rates of return, are at an increasingly high risk of exposure to unregulated, possibly fraudulent, investment schemes, according to Geoff Bouchier, managing director at Duff & Phelps.
Last year, £6.7bn was withdrawn from pension funds, the highest amount since the introduction of the measures. But with figures from the Money Advice Service suggesting that consumers receive 250 million scam calls a year, there is a real danger that pensions built up over a lifetime of hard work will fall into the hands of fraudsters.
The UK’s FTSE350 pension gap reduced by a further £19bn in April to £53bn, the largest reduction since Q4 2016. The reduction continues the gains made in Q1 2018, during which the gap fell by £4bn to £72bn, and builds on the progress achieved in 2017 in which the gap fell by £8bn.
The reduction of defined benefit (DB) pension schemes’ deficits for the UK’s 350 largest listed companies was driven by rising corporate bond yields and a slight fall in market-implied inflation. At the end of April, liability values had fallen by £12bn to £826bn, while asset values were up by £7bn to £773bn.
Alan Baker, head of DB solutions development and a partner at Mercer, says: “We have already seen a meaningful reduction in the pensions gap during 2017 and Q1 2018, and April’s sharp reduction continues this trend. However, the static asset valuations that we have seen for several months and greater volatility in liabilities demonstrate the importance of trustees and sponsors understanding the overall level of risk facing their pension scheme. Trustees and sponsors should ensure they have plans in place to protect them from any downside and to ensure their exposure is in line with their risk appetite.”
Adrian Hartshorn, a senior partner at Mercer, adds: “There are a number of real actions that trustees and sponsors could implement that take advantage of current market conditions, including a range of member options, insurance market solutions and asset-liability hedging.”
Mercer’s data relates to about 50% of all UK pension scheme liabilities and analyses pension deficits calculated using the approach companies have to adopt for their corporate accounts. The data underlying the survey is refreshed as companies report their year-end accounts. Other measures are also relevant for trustees and employers considering their risk exposure. But data published by The Pensions Regulator and elsewhere tells a
There have always been fraudsters and thieves, but there is widespread concern that pensions freedoms, which came into force April 2015, may have made it easier for scammers to prey on the unwary looking for higher rates of return on investments.
The latest HM Revenue & Customs statistics on flexible payments from pensions show that £6.7bn was withdrawn by 375,000 investors in the last 12 months and £17.5bn has been withdrawn from pensions since the freedom changes were introduced April 2015.
Geoff Bouchier, managing director at Duff & Phelps, warns: “According to The Telegraph, some 222,000 pensioners have made half a million withdrawals in the first three months of this year alone – 20,000 more than the last quarter of 2017. The total withdrawn in 2017/2018 was £6.7bn, the highest figure since the reforms were introduced in 2015.” In December 2016, the government warned:
- Research by the Money Advice Service suggests there could be as many as eight scam calls every second – the equivalent of 250 million calls per year. Citizens Advice calculated 10.9 million consumers have received unsolicited contact about their pension since April 2015.
- There were 30,000 defined contribution scheme transfers in 2015/2016, representing £1bn of assets. Industry estimates suggest that fraudsters could be behind as many as one in 10 pension transfer requests.
- Individuals reported nearly £19m in suspected pension liberation fraud between April 2015 and March 2016 – twice as much as for the same period in 2014-15.
- A new report from the Demos thinktank finds economic insecurity in later life is the most pressing challenge for Britain’s burgeoning self-employed workforce.
- Some 4.77m self-employed workers now comprise nearly 15% of the British workforce.
- Only 17% of self-employed workers – and just 13% of self-employed women – participate in a pensions scheme, compared to more than 50% of employees.
- New polling reveals nearly one in two self-employed workers are “seriously concerned” about their lack of savings for retirement (46%), while 38% are “seriously concerned” by current pension provision for the self-employed.
- The government should introduce and pay for a new auto-enrolment pension scheme for the self-employed, matching the April 2019 level of contributions firms must make for their employees. The government would become the ‘de facto’ employer in this new scheme for self-employed workers.
- A new ‘engagers tax’ of 2.5% should be introduced, levied on a firm’s total expenditure on contracted self-employed labour, rising to 5% in 2021.