Don't 'go it alone' with pensions advice
IT'S a constant problem with pensions savers that they are often unaware of all the flexibilities and options now available to them, when approaching retirement.
That problem lies at the core of new proposals from the Financial Conduct Authority (FCA), which aim to reduce the risk that pension savers will act without advice, or without full information on what their options are when it comes to accessing their pension.
These proposals are up for debate throughout the summer, after which a formal policy document will be published early next year.
The FCA takes great pains to stress now risky it can be to ‘go it alone', without advice, when making financial decisions that will shape your future financial life.
They tell us that 94 per cent of consumers who accessed their pots without taking advice accepted the drawdown option offered by their pension provider, compared with only 35 per cent of advised consumers.
Furthermore, a third of those consumers who acted without advice ended up holding their money in cash, which is often the ‘default' strategy of your pension company.
Now this may suit you if you are planning to drawdown all of your savings over a short period. However, the FCA claims these same consumers could get an income pot up to 37 per cent higher over 20 years by moving to a mix of assets.
Consequently, it is now proposed that consumers must actively choose cash, rather than be put into cash by default.
By failing to shop around, taking good advice and looking at a number of providers, customers can inadvertently miss out on valuable opportunities that would have left them in a much stronger financial position. This applies not only to those looking a drawdown options, but also to those opting to buy an annuity. It has long been known that there can be major differences between income levels from annuities at any given time, and buying an unsuitable annuity without advice can cost you thousands in subsequent years.
For example, pension companies should inform annuity buyers if they qualify for an enhanced annuity, which can give a higher income to smokers and others whose lifestyle might suggest they will not be drawing their pension for as long as a healthy person of the same age.
Both these points are emphasised in the FCA recommendations.
Another point was raised that again underlines the importance of advice: the FCA found that 60 per cent of consumers not taking advice about drawdown were not sure, or only had a broad idea, of where their money was invested.
The main proposal to the pension companies themselves is that they send out improved ‘wake-up packs' once every five years for people from age 50 as they approach retirement. This information should include a no-jargon, clearly-worded single-page summary document, it should have risk warnings with regard to various investment options, and also clearly show charges associated with each.
The last word on the crucial importance of professional advice is best left to Christopher Woolard, executive director of strategy and competition at the FCA: “We know that the choices introduced by the pension freedoms have been popular with many consumers. However, they're now required to make more complicated decisions than ever before. Many people need more support when making choices.”
:: Michael Kennedy is an independent financial adviser and pensions specialist, and can be contacted on 028 71886005. Further information on Facebook at Kennedy Independent Financial Advice Ltd or at www.mkennedyfinancial.com