This guest blog was contributed by Keith Richards, Chief Executive of the Personal Finance Society
I have been involved in a series of consumer focused strategy meetings which formed part of a Financial Services Commission which was set up to examine how to improve financial resilience in later life – jointly chaired by Tom Wright, CEO of Age UK and Dr Alexander Scott CEO of the Chartered Insurance Institute.
Industry, consumer and regulatory leaders embraced the opportunity to debate and consider solutions to key later life financial challenges which included the dynamics of planning for later life, encouraging savings, changing public perception of industry trust, the development of good value and flexible financial products and increasing access to information and advice.
UK consumers face the daunting challenge of accumulating sufficient funds for their retirement over their working life and then converting these funds into an appropriate and sustainable income, typically at one point in time. Whilst Government initiatives such as auto-enrolment and proposed changes to state pension entitlement go some way to addressing the former, many consumers remain ill equipped to make vital decisions at the point of retirement.
Whilst we welcome proposals contained within the 2014 Budget (including allowing consumers to access any amount of their pension pot at age 55), as they will provide far greater flexibility around the provision of income in retirement, together with anticipated product development and innovation, they will inevitably lead to a greater range of options for consumers to consider. For this risk to be managed, it is imperative that the ‘guidance guarantee’ contained within the Chancellor’s speech ultimately translates into a service that helps avoid consumers buying, or being sold, unsuitable products at prices that are not affordable or that do not serve their immediate and longer term needs.
Like the Government, the commission participants believe that people deserve dignity and respect in later life and that they should be provided with the support they need. The financial services industry and the Government must take stronger actions around preparing people coming into retirement to have better and more secure financial provision.
As the Government starts to fill in the details of the new rules to be associated with the Care Bill, it is clear it needs to stimulate demand for professional financial advice if consumers are to better understand their funding options. In this context, the commission accepted that advice at the point of retirement is often a gateway to subsequent advice in respect of helping clients release value from their properties and ultimately helping meeting payments for social care.
Whilst rises in the basic state pension, protection of universal benefits for pensioners, simplifying the state pension, and introducing auto-enrolment pension schemes in the workplace are positive developments, there is always going to be a need for investors to engage with their retirement savings at the point of retirement.
When they come to convert their money purchase pension pot into an income, consumers will need to make a series of informed decisions around the type of income they want (they’ll need to look at death benefits, inflation proofing and investment risk; they’ll need to consider whether they are eligible for an enhanced annuity and whether they want to take their retirement income all in one go, in a series of transactions, or indeed whether it is a suitable time to take benefits at all. Putting a future value on each of the above is very challenging, even for consumers with relatively high levels of financial capability.
The key consumer issues driving the regulators Thematic Review into annuities – February 2014, relate to three desired consumer outcomes:
- That consumers are able to maximise their retirement income
- That they do so at the right time
- That they buy the right shape of annuity
Much market ‘noise’ has focused on 1. above (especially given current historically low interest rates and thus annuity rates), but 2 & 3 arguably come before finding the best rate and can only be realistically delivered through consumer engagement with better guidance and qualified, professional advice. Guidance alone or non-advised options however, can leave consumers vulnerable to making the wrong decisions and without financial protection.
Issues preventing consumers maximising their income are varied and interlinked, but clearly include elements of consumer inertia, distrust of financial advisers and providers, access to advice at an acceptable cost, low financial capability, fear of product complexity and consumer loyalty to existing brands. The commissionis helping to address all of these issues.
In the longer term, consumer education and structural changes in the market have the potential to impact positively but will not address more than half a million consumers needing better guidance and advice in 2014 and immediate years thereafter.
The Financial Conduct Authority has identified specific consumer groups where the existing annuity market doesn’t serve them well, namely those eligible for enhanced terms and those with ‘small pots’ (where trivial commutation or the ability to buy extra state pension seem the only realistic alternatives to buying an annuity in a more limited market given the number of providers prepared to establish smaller annuities). A new national retirement advice service could provide people approaching and or in later life with immediate and much needed help, given the one off decision/lifetime consequence of annuitisation.
I look forward to the conclusions and recommendations from Financial Services Commission will be launched on 25 June and will additionally contribute to the governments consultation following the recent budget announcement.