Retirement advice is never easy. The technical complexity of pension rules, taxation and risk management – combined with the uncertainty around markets, client needs and even how long the client might live – creates a difficult challenge to which there is rarely a single, obvious solution.
But, after a relatively benign environment for the first seven years of pension freedom, things have got a whole lot harder in recent years with challenging markets, increased inflation, and rising interest rates.
If these challenges are difficult for advisers, we must consider the struggles faced by those who don’t have access to advice. Looked at through the lens of Consumer Duty, those reaching retirement in DC schemes have low consumer understanding, limited client support and often don’t have access to the products they need without switching provider.
The schemes may be low-cost but that counts for little if people end up making poor decisions on the timing and nature of withdrawals. Recent data from the FCA suggests fewer are taking advice when accessing pensions and we continue to see high rates of encashment and withdrawal. There is always scope for improvement in advice, but the lack of expert help is a barrier to people making sensible retirement decisions.
The case for advice may be clear, but how can we ensure that advice delivers value to clients in what seems set to be a more challenging environment in the years to come?
Firstly, retirement advice should ideally focus on the creation and management of a retirement plan. Clients need help not just in understanding how to finance retirement but thinking through what retirement means for them. What do they want to do, what do they want to achieve and, uncomfortably but importantly, what could get in the way of that? The adviser as a life coach, a skill that is not always recognised but is crucial to effective planning.
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The adviser’s role is then to translate this into a financial plan that not only delivers when things go well but works whatever turbulence we encounter. In an uncertain world, offering themselves as considered guides is probably a more durable proposition for advisers than being judged against market outcomes that they have little control over. A clear financial plan also underpins the value and need for ongoing advice that is under the regulatory spotlight.
Another important factor in delivering value is improving our understanding of how to manage risk for retirees. The risks facing clients in retirement are different from those still accumulating wealth, something the FCA highlights in its recent thematic review. Many retired clients will have limited resilience, that is, the ability to withstand shocks to their finances be that from market falls or inflation spikes.
After the volatility of 2022 when we got both, advisers have started to recognise the need for a different risk management approach for those in retirement. We arguably need to move from the usual aim of maximising wealth that applies during accumulation to a more nuanced approach to risk and return.
Taking enough risk to have a fighting chance of achieving the client’s objectives, but not so much that we put those objectives at risk. This will often involve combining investments and secure income to maximise success.
Finally, we need to look beyond income planning. Our research on the retirement advice market, published last year, found many advisers were looking to offer a more holistic service to clients at retirement. As well as traditional estate planning, some were looking at housing advice and long-term care support.
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The need for help in these areas is already clear today but is likely to become more important as the next cohort of retirees comes through. Generation X will typically have less pension wealth than the baby boomers and so will likely need to use its housing wealth to support retirement.
It’s been a tough couple of years for retirement advice and the thematic review shows that there is much more to be done. But we mustn’t lose sight of the value that good retirement advice can deliver nor forget that our biggest challenge is likely to be meeting the overwhelming demand.
Richard Parkin is head of retirement at BNY Mellon Investment Management
