In January the Financial Conduct Authority announced that it had decided to proceed with its review of the retirement advice market. Also known as “Assessing Suitability 2”, the review is designed to assess the process financial advisers use to deliver retirement advice as well as the quality of their advice. Back in 2020, the FCA contacted over 100 randomly-selected firms as part of its initial efforts to conduct its review. This was put on hold by the pandemic as the regulator focused its resources on other areas such as the issues around the transfer of defined benefit (DB) pensions and its attention was drawn away from retirement advice.
That it has now decided to return to this review comes as no surprise. The size of the retirement advice market and the potential for
poor outcomes means the regulator has always been interested in understanding how this section of the advice market functions.
This is especially true since the introduction of pension freedoms in 2015. Unsurprisingly, when it announced the review, the FCA stated it also wants to understand how consumers’ needs are changing as a result of the rising cost of living. The FCA has announced two broad themes that will guide its assessment of the advice consumers are receiving.
Retirement income advice is a complex area. Some clients think they only need an adviser when they first access their pension savings. However, the need for good advice continues on an ongoing basis even after that pot of money has been accessed. Drawdown means clients have more flexibility in how they access their retirement income, but it often requires the help of advisers and some financial planning.
The Consumer Duty raises a number of questions for advisers. How can advisers demonstrate they are providing the right products and services that meet their clients’ needs in retirement? Do these products and services achieve the right client outcomes? Also, whilst the use of technology is convenient, is it too complex for some clients to understand? There is an expectation that advisers are acting to deliver good customer outcomes and that this should be at the centre of a firm’s strategy.
According to the FCA’s data, in 2021/2022 the number of pension savers who accessed their savings for the first time increased by 18%, while those who chose drawdown increased by 24% year-on-year to 205,641. Meanwhile, 40% of regular withdrawals were done at an annual rate of over 8% of the pot size (compared to 43% in 2020/2021). Although, it should be noted that only a third of pension savers took regulated advice.
An expectation gap exists when it comes to how much some clients believe they can sustainably take as an income in retirement. This gap has considerable consequences for pension savers reaching retirement. Some clients are going to have to squeeze a little bit more out of their portfolio or be slightly disappointed with the style of retirement that they are going to be left with. This is because if people don’t have the sort of money they were planning to retire on at a sustainable withdrawal rate, they face either a more austere retirement or the potential of exhausting their retirement fund.
What this means for retirement advice
Advisers need to have a solution that fits into their retirement process that considers this potential risk of running out of money and
not obsess over things like the variance of a client’s capital value. If advisers think about risk in those terms, they need to structure
their processes in ways that ensure they are compliant.
The shift to consumers drawing an income from pension funds which remain invested has been prominent since 2015 and could
remain this way for a long time as the number and value of defined contribution plans continues to rise. In understanding the needs
of their clients, the responsibility is on advisers to have solutions that consistently deliver suitable advice.
In addition to an investment solution, advisers should also use tools that can monitor the progress of their clients’ retirement plans
and respond to changing consumer needs, like the ongoing cost-of-living crisis and the impact of inflation. If investment markets are
not as stable as they have been over the last decade or so, and we have volatile markets similar to what we witnessed in 2022, using
the wrong tools to manage decumulation and to explain the risks to clients using drawdown will most likely achieve poor customer
Advisers need to be confident that if there ever was a need for their retirement processes to be reviewed in the future, they would
have done the right thing by their clients and are able to evidence and justify their recommendations.
- The FCA’s review of retirement income advice is due to report in the final quarter of 2023
- The size of the market and potential for poor outcomes raises the stakes for the regulator
- Firms will be expected to demonstrate their advice is in line with Consumer Duty
- The regulator is currently gathering evidence for its review and has sent advisers a survey
- Areas under review include business models, income withdrawal strategies and suitability
Toyosi Lewis, Retirement Investment Strategist, FE Investments
This is a marketing communication, intended for professional investors only. Not for use by retail investors. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. The value of investments and the income from them may go down as well as up and you may not get back the amount originally invested.
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The FCA recently released its Retirement Income Data to help advisers understand the retirement landscape and how their clients are looking at retirement. The data looks at trends in pension withdrawal rates, DB to DC pension transfers received as well as the use of advice when clients purchase retirement products, amongst other metrics.