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Yes or no: Should retirees be compelled to get advice before taking their pension?

31 October 2019

Those with a DB pension or guaranteed annuity rate and benefits worth £30,000+ must take regulated advice before they can transfer, but should compulsion extend to all retirement savers accessing their pot?

Woman using tablet and mobile

Yes

Keith Herd, GS Group

Those accessing their pension deserve more than services like the Money and Pensions Service, formed from the merger of Pension Wise, The Pensions Advisory Service and The Money Advice Service at the start of this year, can offer.

For that reason, Keith Herd, a financial consultant at Perth-based GS Group, believes those accessing their pension benefits should be compelled to take independent financial advice.

"From my own experience, clients who have approached me after the event said their initial contact with organisations like these or Citizens Advice, worthy as they are for other matters, proved not to be beneficial. They would have been better served by taking independent advice," he says.

"Clients deserve better – they should be looked at as individuals with specific requirements and only working with a competent financial adviser, who will assess risk and objectives, can produce the best result."

Cost is an issue, of course, but Keith points to most reputable IFA firms undertaking a discovery meeting free of charge. “The cost of the financial advice can be taken as an adviser charge from the product both initially and ongoing so even someone with no spare cash can get good, solid impartial advice,” he says.

Anna Sofat, Addidi

Anna Sofat, founder of London’s Addidi Wealth, believes pension advice should be compulsory and offered as standard by employers from the start of our careers.

“The majority of people retire with less than sufficient funds in their pension and this affects us all in the long run,” she says. “A lot of people rely on minimum contributions but putting even a small amount in on top early in our career really adds up.

“A lot of people are also unaware of what kind of figure they need in their pension to meet their requirements in later life, so they are aimlessly and mindlessly contributing rather than setting themselves a target.”

Retirement can be an emotional time with lots of changes and unknowns to consider. Therefore, it seems responsible to Anna that people should have to seek advice from a professional who can help make the options clearer.

“I don’t think there will be much counterargument when I say the pension system isn’t perfect and there is a lot of nuances that even the most seasoned professionals take a while to understand fully, so making an informed decision without advice seems unlikely for most people,” she says.

Not advice but guidance

Tamsin Caine, Smart Financial Planning

If everyone could afford to take advice, it would be a ‘yes’ for Tamsin Caine, head of financial planning at Greater Manchester-based Smart Financial Planning, but the reality is that they can’t – and advisers can’t afford to provide it to everyone.

“If money were no object, then of course I would say yes, you should definitely compel consumers to take advice before taking their pension but that simply isn’t the case,” she says.

“Someone with £30,000 in a pension isn’t going to pay £1,500 or £3,000 of that to take advice and anyone offering ‘advice’ for less than that is unlikely to be doing a comprehensive job.

“The adviser should be taking all aspects of the client’s life into consideration. This volume of work is likely to lead to a pretty large minimum fee, which is likely to make is unrealistic for consumers whose pensions are of an average value – £60,000 for those aged between 40 and 60 according to LV=.”

The answer, says Tamsin, might lie in compulsory guidance. “Compelling clients to take guidance might be more appropriate and may improve consumer outcomes through awareness of the options but this isn’t personalised advice,” she says.

No

Kay Ingram, LEBC Group

Kay Ingram, director of public policy at LEBC Group, would like to see more consumers seek advice, but believes compulsion is not answer.

“I believe they would benefit from it by gaining a greater understanding of all the risks, but compulsory advice would be resented and increase insistent clients,” she says. “Currently, the advice profession and guidance services would be hard pressed to deliver this in a timely manner to all in need.”

However, she would like to see those who access pensions without advice being subject to a period of reflection. They may then decide to take guidance or advice, change their mind about accessing the pension or continue with their original plan.

“The safeguard I would like to see is the requirement for the non-advised to be given a 30-day cooling off period,” says Kay. “The risks could be explained in simple terms on one page of A4. It would include information on how to get advice or guidance. If after that period of reflection, they still wished to proceed that’s their choice, but I suspect that some may see the value of advice or guidance which would enable them to make better choices.”

Jamie Smith, Foster Denovo

Education – not compulsion – is the key for Jamie Smith, an adviser at Foster Denovo in London.

“It is important that advisers engage positively with consumers and that is often best done through education about the risks of missing out on pension income,” he says. “Simply compelling people to seek advice may be perceived as a negative approach.”

By August 2020, the Financial Conduct Authority wants providers to offer ‘investment pathways’ to non-advised consumers at retirement – an approach that should lead to better outcomes for this cohort.

While making the right decisions at retirement is crucial, Jamie says more must be done to encourage people to seek advice while they are working and accumulating to ensure they are also making the right choices along the way.

“Making poor choices earlier on can also have a significant impact on the size of the pot at a later date and the amount of pension income,” he says. “Education and encouraging people to undertake mid-life reviews at this earlier stage of their journey is going to be key and will require industry wide buy-in.

“We are already seeing positive steps taken, with more and more organisations developing workplace financial wellbeing programmes to support and educate staff.”