Why pension savers need proper advice, not just guidance
Used interchangeably in everyday language, the difference between advice and guidance is important in delivering better outcomes for pension scheme members at retirement. With more people choosing drawdown, often without advice, and withdrawing income at levels that could prove unsustainable, the need for help is unquestionable. But is guidance enough or is advice required?
The new ‘stronger nudge’ towards guidance will prove to be important. Before June this year, defined contribution schemes were only required to signpost members to Pension Wise. Now, when someone applies to access their pension pot, the scheme must offer to book a Pension Wise appointment.
Pension Wise may not be enough
But important though this is, it’s not a panacea. Members can still opt out. But only around 14% of pension pots are accessed after the member has used the impartial Pension Wise service. Even if the new initiative doubles this figure, most people still won’t benefit from Pension Wise.
And the timing may be too late. The offer to book an appointment will usually be triggered by a request to access funds, by which time members may have already decided how they want to use their pension pot.
Retirement isn’t a one-off event. Retirement strategies can be undermined during retirement: changes in health, mentally and physically; the death of a partner; care needs; investment market downturns and more can derail the best laid plans. The challenge isn’t simply to make the right decisions at outset, it’s to review those decisions regularly.
Perhaps most importantly, Pension Wise provides guidance, not advice. It will explain the options people have at retirement, but it will not recommend a solution. For some, this might be enough. It will give them the confidence to make rational decisions or validate their intended course of action.
For others it’s not enough. Many people find this whole subject too complex. They are often baffled by talk of longevity, sequencing risk, inflation and sustainable withdrawal rates.
Advice: the gold standard
Advice remains the gold standard. An adviser will make a personal recommendation based on a thorough understand of the client. They’ll evaluate their financial circumstances, including non- pension assets like housing equity and ISAs. They’ll explore a client’s goals and objectives – what do they want from their retirement – not just in terms of income, but what are their ambitions?
They’ll evaluate attitude to investment risk and capacity for loss to make sure that the client’s temperament is aligned with their investment strategy and that they have the bandwidth to absorb losses. Increasingly, they’ll use cashflow forecast models to project a range of different outcomes and ask ‘what if’ questions.
What’s more, an adviser will regularly review whether the strategy needs to change. Whether these are changes in the economy, like inflation or a market downturn, which can hit assumptions of future value, or changes in personal circumstances, like deteriorating health or marital status, that can affect patterns of spending.
And we shouldn’t ignore the emotional benefits of advice, particularly the stimulus of optimism. Academic studies have found a clear correlation between using an adviser and having a positive outlook on retirement. In particular, it has been found to be a significant predictor of retirement confidence. By taking clients through a structured process, advisers create the invaluable commodity of hope. They fuel a sense of optimism and wellbeing.
Finally, it’s worth remembering that advisers these days must meet exacting standards, hold the right professional qualifications and are liable for the advice they give.
Some schemes offer access to advice
It’s no surprise that some schemes already offer access to advice as well as guidance. A recent Mercer research report suggests that around 15% of the companies surveyed facilitate one-to-one financial advice for scheme members. Ideally, the availability of advice to scheme members should be the holy grail, but regulated face-to-face advice comes at a price and can be uneconomic for many people.
But it doesn’t have to be this way. Employer-sponsored pension schemes and their advisers can make advice accessible. They can secure better deals for members. They can leverage initiatives like the pensions advice allowance to help members tax efficiently fund advice from their pension pot. And they can use their experience of the market to identify affordable advice options.
New digital solutions are coming to market offering fully regulated advice at a significantly lower cost than traditional face-to-face advice. What’s more, some are hybrid models combining digitisation with the opportunity to interact with a person when required.
While some pension schemes already facilitate access to advice for their members, for many others this is the missing piece that could provide better retirement outcomes.
In partnership with HUB Financial Solutions
We are totally focussed on finding the right financial solutions for people approaching, or in, retirement. We don’t do anything else. Our purpose is to help people achieve a better later life.
