Reforms highlight dicey game with smaller pensions

One reason for this is the existence of a large and significant middle market of clients not serviced by any of the main ‘distribution’ channels.

This group may have always existed, but serious attempts to reach them were put on hold when the FSA filed its work on ‘explicit, simplified advice’ on the ‘too difficult’ pile in order to keep the RDR on track.

Banks withdrew, IFAs retreated upmarket and ‘execution only’ only partially filled the gap. The number of these ‘orphaned’ clients – even if they didn’t really regard themselves as such – grew accordingly.

Now the spotlight has been thrown onto this neglected middle by the chancellor’s Budget announcement.

The industry, advisers, consumer groups and even people variously described as savers, investors, consumers and clients are now debating the devilish details of the retirement income reforms.

In the past few weeks, we have heard the Financial Services Consumer Panel’s Teresa Fritz fretting about the lack of potential redress for those in drawdown who think they have been advised but have only been informed. This was then condemned by Hargreaves Lansdown’s Tom McPhail for being patronising towards those who already handle their own drawdowns.

Perhaps more significantly, we have heard the FCA’s David Geale suggesting that drawdown under £50,000 may be unsuitable for advisers to recommend, although he left himself some wriggle room about evolving products.

Helping to underline Mr Geale’s point, Aviva’s pension expert John Lawson then came out with calculations about drawdown and the year of commencement. In many ways it is the best summation of the middle-market dilemma I have heard to date.

Surely ‘mini-drawdown’ is better than cashing out and/or investing in a dodgy property scheme.

If you had started with £50,000 in 1999 and taken an income, under the new rules, you would have almost exhausted the pot already – well short of life expectancy.

However, if you had started in 2009, despite taking a reasonable income, you would still have a pot of £80,000.

In other words, simply time the market perfectly and ‘Hey presto!’

Yet what if clients with mid-sized pots insist on drawdown. Are they shown the door and left to construct their own do-it-yourself portfolios?

Surely ‘mini-drawdown’ is better than cashing out and/or investing in a dodgy property scheme.

Yet if, as Mr Lawson suggests, the best mix may be a combination of annuity and drawdown, who will recommend that. TPAS? An employer and their consultant? A planner who provides advice but no transactions?

Independent compliance consultant Adam Samuel has a novel suggestion for sidestepping the problem. He said for those who insist on drawdown, advisers could give limited advice about the construction of the portfolio, provided it was well documented that the adviser would have otherwise recommended an annuity.

But he also proposed that investment advisers simply didn’t advise such clients.

It’s clear the RDR left a big segment of the population to their own devices and these people are difficult for firms to reach compliantly and financially. Perhaps these retirement reforms will highlight why that is such a big mistake.

John Lappin blogs about industry issues at www.themoneydebate.co.uk