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The Vital Role Of Pensions Advice Hero

The Vital Role Of Pensions Advice - Striking The Right Balance With Income Drawdown

23 June 2021

By Simon Biddlecombe, Account Director, EQ Hazell Carr

We examine how the lure of income drawdown options could be exposing thousands to future pensions problems, and how the industry is responding. Getting the right, independent advice is key to maintaining consumer freedoms without exposing them to excessive risk.

Simon Biddlecombe Headshot Simon Biddlecombe Account Director, EQ Hazell Carr

The option of income drawdown is an ideal way of getting pension income when you retire, while still allowing your pension fund to continue growing. Instead of using all the money in your pension fund to buy an annuity, you leave your money invested and take a regular income direct from the fund as required.

Figures released by HMRC show a high level of drawdown withdrawals last year. The total amount taken was £2.4 billion – a rise of 6% on the £2.2 billion over the same period in the previous year. So whilst these new options have proved very popular, how is this playing out in practice since the introduction of Pension Freedoms in 2015?

Taking too much out, too soon

A recent report found that, for some, drawdown pensions may not meet their objectives of how they will want to use their money in retirement.

There are definite advantages of drawdown in providing a more flexible retirement income. But, it must be balanced with the risk that the fund’s performance will fluctuate and that the money may eventually run out.

A recent report found that, for some, drawdown pensions may not meet their objectives of how they will want to use their money in retirement. Many people who have already been affected, as the FCA Retirement outcome review suggests, are consumers who did not seek financial advice.

Drawing from a fund in a falling market makes it harder for the fund to recover later, as it has less capital to work with. The fragile market environment we have seen since the pandemic serves to highlight this risk. It also underlines the importance of reinvesting the pension pot in funds specifically designed and managed for the purpose of providing a regular retirement income

Research by Zurich indicates that more than half of consumers are unaware of these options. This may be because drawdown was chosen on a non-advised basis. FCA figures would seem to support this, showing that only 36% of plans accessed for the first time in 2019/20 were accessed by plan holders who took regulated advice (no change from 2018/19).

Time to intervene?

According to the FCA, circa 615,000 people have accessed pensions via drawdown since pension freedoms were introduced. There is now real concern that many people are taking far more than is sustainable out of their pensions early in retirement. This leaves them at risk of financial hardship later in life, running a serious risk of exhausting their pension pots too quickly.

Pensions via Drawdown

FCA retirement income market data shows that plans fully withdrawn at first time of access in 2019/20 increased by 5% to 375,500. 9 out of 10 of these were for pot sizes less than £30,000. The total number of plans fully withdrawn in 2019/20 remained steady at around 440,000 for the year with a value withdrawn of just under £5.7 billion.

A recent study by Age UK also revealed growing anxiety among pension providers that retirees do not fully understand the risks of drawdown products and are concerned by the problems this could be storing up for the future.

The importance of a better understanding of the potential consequences of taking your pension too early and the benefits of giving your investments more time to grow cannot be ignored.

Another worrying indicator is HMRC reporting tax takings from pensions were £2 billion more than expected, due to pensioners drawing large lump sums all at once, and/or drawing so much that they pay tax at a higher rate. Add in the risk of incurring higher fund management charges than necessary, and this only serves to highlight the importance for financial advice and guidance to consumers.

Pension Wise is a good starting point

Age UK recommends that, as a minimum, people soon to retire should use the government’s free Pension Wise service, often as a prelude to seeking independent advice.

Age UK’s charity director Caroline Abrahams said, “There's no doubt that many are enjoying and benefiting from the greater flexibility they've been given. However, we are worried that a lot of older people ... are making risky decisions that could leave them in a mess in a few years' time.”

Age UK recommends that, as a minimum, people soon to retire should use the government’s free Pension Wise service, often as a prelude to seeking independent advice.

However, take up of Pension Wise guidance remains low. To counter this, the FCA has just proposed new rules to require pension providers to ‘nudge’ consumers to Pension Wise in order to benefit from guidance before they access their defined contribution pension savings. There are even recommended to go as far as booking an appointment with Pension Wise if the consumer wishes.

Currently, pension providers are required to signpost consumers to Pension Wise guidance and encourage them to seek appropriate pension guidance or advice to help them understand their options. However as take up continues to remain low, this is an important initiative as it will give those close to retirement a further opportunity to benefit from Pension Wise guidance before they access their pension.

Offering responsible support for all consumers

pension savings

Sheldon Mills Executive Director, Consumers and Competition at the FCA said:

“Pension Wise is a great service which helps people to understand their options when accessing their pension savings. We know that when people use Pension Wise they are happy with the service and find it helpful. However, few people are choosing to attend a guidance appointment.

Our proposals will help to ensure that consumers get more information about the service, are further encouraged to use it and can have an appointment booked for them there and then.”

While Parliament has chosen not to make these appointments mandatory, there is a desire to increase take up. It’s also good to see that the FCA also invites additional ideas on how to increase the take-up of Pension Wise beyond this nudge at the point of access so hopefully we will see further initiative emerge in this space.

One thing is for sure, providers and advisers alike will come under increased scrutiny to mitigate against consumer loss through poor or ill informed decisions. This represents a great opportunity for the sector to deliver even better value and service to consumers.

With the Office for National Statistics reporting that some 1million people are due to turn 55 this year, the need for advice and guidance has never been greater.

Make the complex simple

The problems around income drawdown is yet another example of how these relatively new and increasingly complex retirement options are affecting a public that still finds the topic of pensions confusing. As regulators turn their attention to what constitutes appropriate advice and customer communication, as well as the vulnerability of those consumers, pension providers, advisers and administrators all need to evidence they are acting in the consumer’s best interests.

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EQ has decades of experience working with pensions firms to help them administer their schemes, evidence regulatory compliance with changing requirements and provide the best possible service to their customers.

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