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Give people pension cash to pay for advice, says FCA
City regulator recommends savers allowed to take small part of their pension pots to pay for financial advice before retirement.
by Michelle McGagh on Mar 14, 2016 at 15:54
The City regulator has recommended that savers are allowed to withdraw a ‘small part’ of their pension pots in order to pay for financial advice before they retire.
In a wide-ranging review of financial advice, the Financial Conduct Authority (FCA) called on the government to implement changes that would make it easier for individuals to receive professional financial advice.
In its Financial Advice Market Review (FAMR), the regulator said retirement was a ‘key milestone’ in a person’s life and a time when they would benefit from advice.
‘To make financial advice more accessible, FAMR has called on the government to allow consumers to access a small part of their pension pot to redeem against the cost of pre-retirement advice,’ it said.
The FAMR marks the second attempt by the regulator to reform the provision of financial advice. After five years of consultation it published the retail distribution review (RDR) in 2013 which set out higher qualifications for advisers, banned them taking commission from financial product providers and increased the range of investments they had to consider in order to call themselves 'independent'.
At the time many people warned that while the measures would raise standards among financial advisers, it would push the cost of their fees beyond the reach of the ordinary public. Such forecasts have proved to be correct with the vast majority of professional advisers now targeting wealthy clients only.
Malcolm Mclean of Barnett Waddingham, a pension adviser, said offering people access to their fund prior to age 55 was ‘worth a try’ following the RDR reforms.
'Guidance' vs personal advice
The FCA also wants advice to be made more affordable by changing the definition of ‘regulated advice’ to mean a personal recommendation. This would enable more firms to give ‘guidance’ to consumers on their options, which would involve less regulation and red tap than full advice.
The report said this would ‘support firms offering services that help consumers to make their own investment decisions without a personal recommendation’.
‘At present, a number of firms do not have the confidence to develop advice services to meet simple consumer needs,’ said the report.
‘As a result, many consumers who want to receive this kind of support are either left without it, or are required to pay for full advice. The review recommends developing a clear framework to give firms the confidence to deliver advice on simple consumer needs in a proportionate way.’
Steve Cameron, pensions director at Aegon, a pension provider, said the difference between advice and guidance needed to be clearly spelt out to consumers. ‘Advice might be described as a recommendation being made "for me’" whereas guidance might be framed as discussing options "with me", leaving the final decision to the customer,’ he said.
‘It is important to make clear where personal responsibility lies under each approach, and what protections the customer has if things go wrong.’
While changing the definition of advice is all well and good, it doesn’t make much difference if people aren’t seeking help in the first place. This is why the regulator has recommended that people are given a ‘strong nudge’ to seek advice before retirement before the minimum retirement age of 55.
‘This "nudge" could take place five to 10 years before individuals reach their normal minimum pension age so that the individual has enough time to plan for, and if necessary step up their saving rate, ahead of retirement,’ said the report.
Adviser search engine Unbiased.co.uk claimed that its research found that people who sought retirement advice increased their retirement savings by an average of £98 a month.
Andrew Pennie, an adviser at Intelligent Pensions, said individuals needed far more help with retirement planning than they currently received.
‘We have been championing the need for more affordable advice solutions in the years approaching retirement rather than the current system of "wake-up packs" [sent out by pension providers before retirement] and "one-size-fits-all" investment solutions which simply aren’t working,’ he said.
‘Effective advice in the pre-retirement years should help people identify the most appropriate retirement income solution for their needs and then how best to invest to achieve it.’
He added that receiving advice pre-retirement would also ‘help people to test the feasibility of their retirement plans’.
‘Can they afford to retire? Should they be saving more? Are they invested correctly? – all too often, people retiring today only identify a problem or shortfall at the point of retirement when it’s too late to do anything about it,’ said Pennie.
Useful 'rules of thumb'
The report does not just focus on those at retirement. It also recommended introducing industry ‘rules of thumb’ that would help younger savers to understand how much they should be putting away.
‘There may be nudges that could be delivered at relevant life stages to prompt consumers to consider whether they have the financial products to meet their needs,’ it said.
‘For example; when starting a family, consider whether you could cope financially if your income stopped because of illness or accident, or whether you could benefit from taking out income protection.’
The regulator said rules of thumb were ‘simple principles which are generally reliable in the absence of full advice, such as broad steers on how to achieve a certain financial goal’, such as save three months’ income to help you cope with an emergency.
‘The development and dissemination of nudges and rules of thumb…has the potential to have a positive effect on those who are not currently engaged with their finance,’ said the FCA.
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