In January 2023, the Financial Conduct Authority (FCA) announced it was proceeding with a thematic review of how financial advisers are delivering retirement income advice and the quality of outcomes for consumers.
The review was previously paused due to covid.
Overall, the review is examining how the retirement income advice market is functioning and how firms are responding to changing consumer needs as a result of the rising cost of living.
The FCA said the results would also be “an important indicator of how firms are implementing the Consumer Duty”.
The findings, which will be used to inform future strategy, are due to be published in Q4 this year.
Recently, a poll of advisers by Copia Capital Management revealed that more than half (52%) believe the review of retirement income advice should recommend that a different investment approach is required for clients in decumulation compared to those in accumulation.
Some 42% believed the decision is not clear-cut, while just 5% don’t think a different approach should be recommended.
Market insight
International Adviser asked Canada Life, GSB, EV, the Openwork Partnership, Calculus Capital and Hoxton Capital Management what they expect from the review and for their views on the changes that might arise.
They were also asked about the impact that pension freedoms and decumulation have had on the retirement advice market.
In the light of a shifting market and economic backdrop, Stuart Dodson, managing director at The Openwork Partnership, welcomed the review.
“Given the change in the solutions available, market volatility and the cost-of-living crisis, we believe this is a timely review by the FCA,” Dodson said.
Drawdown domination
Andrew Tully, technical director at Canada Life, also referred to the timeliness of the review: “It’s probably a surprise that the FCA hasn’t looked closely at the retirement income market since the pension freedoms were introduced in 2015, although it has been focused on the defined-benefit-transfer market.
“Given the wider range of retirement options available, it is important consumers get good advice at the point they first access their pensions savings and on an ongoing basis to work out the best options for their individual circumstances.
“Drawdown has dominated the retirement market since 2015, although with annuity rates up substantially over the last six months, it will be interesting to see how many clients move towards a guaranteed income or a blended option, with the certainty of annuity working alongside the flexibility of drawdown.
“Drawdown advice can be complex, covering areas such as the sustainability over a long time period; the ideal investment options; and tax advice, including the lifetime allowance and how to pass on wealth efficiently to family. Advisers need to be clearly documenting their advice as that is one of the areas the FCA very much focused on during the DB transfer review.
“It may also provide an opportunity to review and feed back to government about some elements of tax policy. The money purchase annual allowance is one area where we believe a minor change could benefit many clients.
“Advisers will also have to deal with many older clients in drawdown and while drawdown has been around for many years, it is relatively recently that clients will have been continuing invested in drawdown beyond age 75. As people enter later life, there is an increased possibility of cognitive decline and vulnerabilities so advisers will want to have policies in place to help clients in these areas.”
Consumer outcomes
Dean Kemble, chief commercial officer at GSB, also highlighted the importance of consumer outcomes: “As financial planners we have a very important role to play in helping our clients make the best of their pensions, savings and investments to enjoy their retirement and never run out of money. “Making the wrong choice could make the difference between someone enjoying a fulfilling retirement and one where they are struggling to make ends meet.
“Annuity rates, bond yields and cash interest rates have risen sharply in the last year. Advice that was given a few years back could be unsuitable now; a good financial planner would account for this and identify that a solution identified when a client was in their 60s could be no longer appropriate when the client is in their 70s.”
Kemble also anticipated possible feedback to the government.
“It would not be surprising if after the review, the regulator will look at advising the government on reversing the current legislation and introducing some sort of minimum income guaranteed as it was previously,” he added.
‘Widespread adoption of best practices’
Hoxton Capital Management compliance director Paul Tate anticipates change for the better following the review.
“We believe the outcome of this review will lead to widespread adoption of best practices and will ultimately lead to huge positive impact in consumers’ later-life years,” Tate said. “Many firms have historically focused on clients within their accumulation years in the run-up to retirement, as this is where most of the revenue has historically been found within the industry and a lot of financial advisers can relate to this stage, being in the ‘working years’ themselves.
“There is a shift within the industry as the demographics change due to baby boomers leaving accumulation and heading into drawdown to fund retirement.
“The bulk of global wealth sits with this demographic and requires financial advisers to become more astute in managing the risk of depleting assets as their clients shift. Likewise, as older financial advisers retire, their succession plans tend to involve younger advisers taking over their clients. It becomes critical that younger advisers upskill in this area in preparation.”
‘Risks and objectives are the opposite of those in accumulation’
Andrew Storey, group innovation director at fintech specialists EV, also pointed to the importance of tailored advice in the decumulation stage.
Storey said: “The biggest concern for the FCA is likely to be how advisers support those who are moving to decumulation. The advice market has great experience in supporting those in the accumulation stage; however, the risks and objectives are the opposite of those in accumulation.
“Most individuals need to understand what a sustainable income looks like for the duration of their lives. Pre pension freedoms, drawdown was limited to those who were wealthy, with GAD (government actuary’s department) limits set on drawdown levels and a three-year review required, with the majority taking out an annuity.
“Post 2015, we’ve seen a reduction in annuity purchases (although these are rising again now) and a greater shift towards drawdown for those with smaller pension pots: a key question for the FCA will be whether this trend is delivering the best outcomes for individuals.
“I think the FCA will want to ensure that advisers are reviewing all the different retirement income options given the client’s objectives, and that they are deciding based on facts and forecasts rather than automatically defaulting to a drawdown-only solution, based on a gut feeling about how useful an investment an annuity is.
“The FCA will also likely be keen to understand how advisers identify income objectives and account for risk and capacity for loss for less wealthy individuals. Does the risk profiling take into account the need for secure income rather than just growth? There is clearly a link between the two as if you get higher growth, you can take higher income, but this is about stability and sustainability, which is different to the pure growth objective in accumulation.
“Our own experience shows most advisers repurpose an accumulation strategy for decumulation, with very few using income-specific risk questionnaires or income risk measures. There’s also likely a question on how frequently reviews are carried out to ensure income levels remain.”
Advisers need to adapt
Madeleine Ingram, director at Calculus Capital, emphasised the need for advisers’ services to evolve, as pensions and consumers’ retirement income needs evolve.
She said: “With the shift away from DB pensions, more retirees are relying on invested pension funds for income − and that means professional advice needs to adapt to keep up with the times.”
