Should IFAs worry about Labour’s plans to price-cap income drawdown?
The answer to that is a very definite ‘yes’. It could see another dramatic intervention in the business model of investment advisers.
Of course, the threat is not definite, depending on the election – it might not even be a medium-term threat because most of the concerns appear to be about the mass market. Indeed advisers may well be insulated by the customer-agreed, adviser-charging regime.
From what we can discern, Labour’s interest is coloured by consumer group Which?’s views about drawdown, and recent research where it modelled people on moderate pots running out of money.
Which? is seeking the establishment of a government-backed drawdown provider and a price cap – though its main concern seems to be concentrated on those who ‘default’ into drawdown.
The explanation for this actually has some internal logic (not too much, but some). We are possibly replacing a system where a huge number of pension investors annuitised with the same provider, with one where a large number of people remain invested in something approximating to drawdown – also with the same provider.
We may be replacing a system where people often got poor value annuities (by not shopping around) by one where they suffer high charges for staying invested.
We have to be wary here, of course – we really don’t know how people will behave. We can’t be sure who will or won’t offer a home for investors’ money and at what cost, and certainly not which providers will or won’t provide all the options offered by ‘freedom’ and ‘choice’.
We don’t know how much of any decision, or lack thereof, by pension savers will involve ‘defaulting’. Some may wish very easy access to their pension over the next four or five years because that is the most tax-efficient method of withdrawing everything.
Those arrangements won’t really look like drawdown in its current form, though of course drawdown itself will be different, too, with no restrictions on withdrawals. Some people will self-select drawdown and should therefore be able to take advantage of a reasonably and indeed increasingly competitive market.
It is also clear that the focus of much consumerist thinking is concerned with the middle market, and not for the most part the currently advised market.
However, it is not very hard to see any price cap, or state-backed alternative affecting everything else.
Some providers have already voiced concerns about adviser charging and the risk of pots eroding too fast, particularly, though not exclusively, at the lower end of the advised income drawdown scale. There must be a definite risk of regulatory contagion, were a left leaning government to turn its attention to the matter.