It is well known that we have an advice gap – it has been talked about for years – but until now few ideas have been put forward to tackle it.
I say until now, because I hope the Government’s Financial Advice Market Review will be the stimulus for real solutions on how to increase the take-up of regulated financial advice.
If it does not, as an industry we will have failed our customers.
The problem is complex, but at its heart people are not saving enough for their retirement. Worse still, they are losing out by not seeking advice to secure the best solutions when they do retire.
While retirement saving has been boosted by auto-enrolment, and freedom and choice, the complexity of decisions is overwhelming for most people. A lack of affordable, accessible regulated advice means we are on the cusp of a ‘mis-buying’ scandal, likely to bite within the next five years.
We estimate nearly half a million people retire each year without taking financial advice. High consumer inertia and low understanding of the value of regulated advice, means most pensioners miss out on the help they need to get the most from their savings.
If we fixed the problem by increasing take-up of regulated financial advice, everyone would benefit. Not only would individuals be better off – typically someone who takes advice and shops around for an annuity receives a 23 per cent increase in retirement income – but they would be less likely to rely on state support in retirement and would contribute more to the UK economy. At a time when the Government’s priority is to put Britain’s public services and welfare system on a sustainable long-term footing, high take-up of regulated financial advice can play a key role in achieving this goal.
We will not, however, close the advice gap by tinkering around the edges. To meet the needs of the ‘mass unadvised’, fundamental change is needed and some degree of automation will be part of the answer.
Low-cost regulated advice solutions already exist, such as full regulated online retirement services that can help advisers service customers with smaller pots, helping to close the advice gap from the ‘top down’.
Industry action must be supported by a positive regulatory and legislative environment. There is, of course, no silver bullet, but if the Government introduces a package of bold measures I believe everyone could have access to affordable, easy-to-understand, regulated advice at retirement.
The starting point should be a single definition of ‘advice’. Research shows people are confused about the various levels and type of advice and this puts them off taking it. We recommend three easy-to-understand categories: information, Government-backed guidance and regulated financial advice, with clear descriptions about what each offers and the guarantees and consumer protection they afford.
Second, ‘safe harbours’ must be avoided. Research shows that they lower consumer trust in advice, whereas simplifying the definition of professional advice would increase take-up.
To make informed decisions people need up-to-date information. All working age adults should receive an annual ‘pensions passport’ that identifies the consolidated value of their personal pensions.
I firmly believe that the Government also has a role to play in incentivising advice to kick-start demand. This could be through a regulated advice voucher or extending the employee tax allowance for advice. Low-cost online advice services would increase the power of such initiatives.
Research shows this would be popular with people approaching retirement. Just over a quarter – 27 per cent – of people recently surveyed said they were “much more likely” to take financial advice if they received a voucher from either the Government or their employer to help towards the cost. A further 36 per cent said they were “a bit more likely” to get financial advice. In all, two-thirds of people would be more likely to use a financial adviser if they received a voucher.
Of course, a voucher does not come without cost, and I recommend that some of the industry levy apportioned to the delivery of Pension Wise and the Money Advice Service budget could be used to subsidise advice for individuals who would be most likely to gain and least likely to be able to afford it.
An alternative, and potentially more radical funding solution for the voucher, would be to impose an ‘internal vesting’ levy on pension providers. The Government could impose a levy each time an individual takes any retirement income product from their existing provider, as this would suggest the customer may not have shopped around.
Under current tax arrangements, if an employer pays fees to an external provider for one-to-one sessions to provide pensions advice, this is exempt from tax as long as the cost is no more than £150 per employee per year. If the cost of the advice exceeds £150 per person, the whole amount is taxable, not just the excess over £150. In light of auto-enrolment and new low-cost advice technology solutions available, I believe the Government should extend this allowance to £250 and remove the restriction that if the advice exceeds this figure, the whole amount is taxable. This would incentivise employers to pay for pensions’ advice for employees and encourage the take-up of advice through the workplace. The use of lower cost-online solutions would further increase the power of these allowances.
Finally, to encourage shopping around, I believe the Government should mandate Pension Wise if regulated advice has not been taken. The output from a Pension Wise session should be used as a fact-find and suitability assessment for a personal recommendation from regulated financial advice.
There are many reasons for the advice gap both on the supply side and the demand side, but ultimately the advice market impasse needs to be unlocked, and urgently, if we are to avoid a ‘mis-buying’ scandal in the next few years. It is up to the Government, regulators and the industry to make that happen.
Richard Rowney is managing director, Life & Pensions, at LV=
Key Points
It is hoped the Government’s Financial Advice Market Review will be a stimulus for real solutions on how to increase the take-up of regulated financial advice.
The starting point should be a single definition of ‘advice’.
Government also has a role to play in incentivising advice to kick-start demand.
