Plans to hand ultimate freedom to pensioners over their pension savings could be undermined by an “advice black hole” as a result of changes to the advice sector under the Retail Distribution Review, according to a new report.
Almost two thirds of people want to get financial advice on their retirement from a financial adviser but are unable to afford it due to the ‘advice gap’ that has been often cited in the wake of the RDR, PricewaterhouseCoopers warns.
PwC’s survey of 1,208 consumers aged between 50 to 75 revealed that 63 per cent of consumers have or intend to ask for financial advice from an IFA on how they will access their pension pot.
However, with half of respondents having pension pots of under £40,000, PwC this raises questions on the affordability of advice and whether IFAs will be able to provide value for money for small pension pots.
The government has given the Financial Conduct Authority £20m to devise a system of ‘guidance’ for all pensioners as they approach retirement, to help them make informed choices. The service is to be administered through providers, Budget documents revealed.
There has been considerable debate as to how this advice - described in the Budget speech as “face-to-face advice” - will work. Last week Association of British Insurers director-general Otto Thoresen told MPs those with less than £30,000 to invest did not necessarily need face-to-face advice.
Mr Thoresen also warned the service would not be ‘free’ and that it would filter through to consumers indirectly through their annual fees, echoing RDR debates over advice charges and commission.
PwC’s survey found the most important factors for consumers deciding how to manage their pension pot are having the certainty of a guaranteed income for life, followed by tax efficiency.
Having a simple and understandable product ranked surprisingly low, just higher than dependents having security after death, which respondents considered their lowest priority.
PwC said the results suggest claim the annuities market could decline by up to 75 per cent following changes announced in the Budget which mean that consumers will have more flexibility with their pensions.
There have been several predictions as to how much the annuity market will shrink, with RBC Capital predicting it will plummet by 90 per cent. Legal and General, itself a provider of annuities, predicted the market would slump 75 per cent to less than £3bn in annual premiums.
Jonathan Howe, PwC UK insurance leader, highlighted it was clear that life insurers were in for a shake-up following the annuity announcements in the Budget, which saw more than £4bn wiped of providers’ shares in one day.
Mr Howe said he thinks people will still want to invest a “small part” of their pension pot in an annuity and that it is “crucial” insurers offer innovative new products to satisfy customer needs and “to fill the hole left by up to a 75 per cent fall in annuity sales”.
He said: “63 per cent of consumers have or intend to ask for financial advice from an IFA on how they will access their pension pot, which is likely to account for the low ranking in importance of having a simple product.
“However, the key point here is that many consumers may not have a big enough pension pot to justify significant advice fees, particularly as since the Retail Distribution Review came in last year IFAs now have to charge fixed service fees to customers.
“What we will see is an advice ‘black hole’ – a supply gap between what consumers want and what they can get. The government’s free guidance will no doubt have its limits, and consumers will turn to their product providers for help in deciding what to do.
“This is a good opportunity for financial institutions to react to customers and to offer new products and services that suit their needs. Our survey shows that over 50 per cent of people still want to buy products offered by financial institutions, and given the key focus on guaranteed income for life, insurers’ expertise in the area of longevity risk will be key.”
