Read more from Prospect's recent pensions supplement
Now that people have so many new pension freedoms, are they able to get the advice that they need in order to make the most of their new freedom? With the introduction of the new pension flexibilities, decisions about what to do with a Defined Contribution (DC) pension pot have never been more important. As the new freedoms mean that what was already a difficult decision has become even more complex, individuals will need all of the help that they can get.
Recently, there has been an increased focus on the roles of both guidance and regulated financial advice in the decision-making process. Despite the government launching a free (and very well received) guidance service called Pension Wise, only 17 per cent of people told their pension provider that they had used it. Even if some might be using guidance from their pension provider instead, and some might feel they do not need guidance as the sums involved are relatively small, this still seems low.
The current landscape for financial advice in the UK has been shaped by regulation. The Retail Distribution Review (RDR) at the beginning of 2013 made far-reaching changes to the delivery of financial advice and may well have contributed (as acknowledged by Tracey McDermott, Acting Chief Executive of the Financial Conduct Authority) to the decrease in the number of Independent Financial Advisers (IFAs). IFAs also tend to focus, for understandable reasons, on wealthier individuals.
But we do know that there is a group of individuals coming up to retirement who will rely on their DC pension savings to supplement their state pension. This group is unlikely to have easy access to regulated financial advice. The Financial Advice Market Review, undertaken jointly by the Treasury and FCA is looking at ways to close this gap.
These individuals face a range of barriers to seeking advice, as well as a lack of access. They may be unaware of the existence of advice, be unsure how to access it or not able to afford it. They may not trust financial advisors, think they won’t benefit from it, or feel they can do a better job themselves. Or they might not ever find the right time to seek advice, or just avoid the issue completely.
Barriers to seeking financial advice
• Lack of awareness that advice exists • Inability to afford advice or unwillingness to pay for advice at its current cost, including a perception of the cost of advice as a loss • Lack of trust in financial services • Lack of understanding of the benefits of financial advice • Feelings of powerlessness or helplessness around issues related to finances • Absence of an event that might trigger individuals to seek financial advice • ‘Egotistic discounting’, overconfidence in one’s own decisions
There is a gap between how much advice costs to deliver and the value that individuals place on it. Recent proposals have focused on increasing the supply and reducing the cost of advice.
One possibility is to make more use of technology to provide solutions that can be accessed by more people at lower cost. The use of automated advice services, where advice is given over the phone using a computer-driven mechanism, and online guidance, is emerging in the UK and may be able to reduce the cost so that it is perceived as affordable. A recent tie up between a large not-for-profit pension provider and an automated advice service offers members initial advice—fully authorised by the FCA—for just £49.
"New freedoms mean that a difficult decision has become even more complex"Solutions with lower fees may increase the numbers of people using advice. Compared to the free guidance services, advice solutions also have the benefit of offering a product recommendation, which pension providers will welcome.
Even if fully-automated advice becomes widely available, there will still be a reluctance on the part of some people to seek or take advice in the first place. But if widespread use of advice led to better financial outcomes for individuals, this could lead to wider economic benefits. Set against this, safeguards would be needed against fraud, customers incurring unexpected costs (where the value of the advice exceeds the voucher value) and low-quality advice where services are set up simply to access the voucher scheme.
Although solutions are emerging, there is still a lot of work to be done before advice will be available to all those who want and need it.
