It’s time to sort out,once and for all, the issue of advice at the retirement stage. The financial press throughout August have been full of articles from industry experts, all critical of the lack of advice being given to people who are retiring and the resulting bad choices that are being made in terms of product purchase.
Simon Smallcombe, managing director of Axa Life Invest, recently introduced research carried out by the company that revealed only 33% of retirees had received any advice prior to purchasing a decumulation product. This is a truly shocking figure and demonstrates that there is an urgent need for the UK to address this issue. Given the numbers that are due to retire over the next five years, there is no time to be lost.
When considering this issue, a number of facts are clear. Firstly it is very expensive for the country when retirees buy poor value pensions. The average size pension pot is only £30,000 and therefore the annuity received from it will be in the region of £1,700 per annum. This is not much on top of the state basic pension and therefore the chances of the pensioner requiring further state support in terms of supplementary benefits is very high. Surveys have shown that ranges for the amount of pension that can be got for a small pot can vary by up to 100%, an amount that if achieved reduces the onus on the state to top-up it’s state pension.
Secondly, the public is very wary of paying fees for financial advice. The changes wrought by the Retail Distribution Review have not bedded down yet and the average person is still shocked when being told that they will have to pay hundreds of pounds for advice and inclined, usually wrongly, to think that they could do better themselves and still keep their full pension pot.
Thirdly, the lack of financial education means that inertia plays a big part. Upon retirement, there are many forms to fill out and this appears to be just one more. It feels like too much effort to try to improve one’s annuity by shopping around, particularly as retirement is such an emotional time. Frequently pensioners are frightened at the approach of retirement and aren't as focused on the details as they should be.
Finally, it is the employer’s duty to keep the firm going, not to arrange the future of retirees. While some firms do, they are in a minority in terms of the coverage as the majority of firms are small and medium size enterprises without large Human Resources departments and therefore don’t have the capacity to help with this. In any case, HR departments need to be careful that they don’t cross the line into giving advice or they could find themselves on the wrong end of a class action.
The cost to the state of support of retirees unable to support themselves is immense. The advice issue needs to be solved. There has been suggestion that it should come from the pensioner’s pot or from their 25% tax-free allowance but this is likely to cause resentment given the way retirement has been structured for many years and in fact may be in breach of contract.
A better approach is for government to admit that they have a vested interest a provide vouchers to each person approach state pension age entitling them to a two hour financial health check with a registered IFA. This would be of great assistance to those with basic pension needs. Those with more complex needs are generally those with more money and should be in a position to top-up the voucher to get further advice.
Only this way can we ensure decent returns for pensioners for their life savings. The FCA have the RDR to ensure that there is no mis-selling but by driving people away from advice, the FCA may end up being responsible for the next pensions scandal – the mis-buying of annuities by the unadvised masses.
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